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Digitized  by  the  Internet  Archive 

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http://www.archive.org/details/cpaauditingquestOObentrich 


C.  P-  A.  Auditing  Questions 

To  January  i,  19 14 


Comprising  All  the  Available  Examination  Questions 

in  Auditing  That  Have  Been  Set  by  C.  P.  A. 

Examining  Boards  Up  To  and  Including 

December  31,  191 3 


COMPILED  BY 

HARRY  C.    BENTLEY,  C.  P.  A, 


NEW  YORK 

THE  RONALD  PRESS  COMPANY 

1914 


.i""'' 


y^^°-^^ 


Copyright,  1914, 

BY 

HARRY   C.   BENTLEY 


The  William  G.  Hewitt  Pre« 

Brooklyn,    New  York 


PREFACE 

This  compilation  involved  the  inspection  of  the  avail- 
able C.  P.  A.  questions  in  auditing,  which  have  been  set  up 
to  January  1, 1914,  by  boards  of  examiners  of  the  thirty-two 
states  having  C.  P.  A.  laws.  Duplicate  questions  have  been 
eliminated,  the  questions  retained  being  credited,  as  far  as 
possible,  to  the  state  boards  by  which  they  were  originally 
propounded.  In  some  cases  questions  are  included  which 
partially  duplicate  others  but  which  include  some  essential 
features  not  stated  elsewhere.  It  is  the  writer's  intention  to 
publish  the  answers  to  these  questions  in  a  subsequent 
volume. 

The  following  tabulation  shows  the  total  number  of 
audit  questions  set  by  each  state  board  of  examiners  up  to 
and  including  December,  1913,  and  the  number  of  original 
questions  selected;  by  the  author.  The  balance  may  be  said  to 
represent  duplicate  questions;  e.  g.,  New  York  leads  with 
a  total  of  525  questions,  of  which  309  are  originals,  leaving 
2i6"as  representing  duplicates  (about  41  per  cent). 

From  the  totals  of  this  tabulatipn  it  will  be  seen  that  the 
totaljiumber  of  available  C.  P.  A.  questions  in  auditing'  up 
to  January,  1914  (and  including  Maine  questions  for  Jan- 
ti^ry,.  1914),  is  1>353,  of  which  705  are  originals  and  648 
are  duplicates  (about  48  per  cent). 

In  the  opinion  of  the  writer  the  C.  P.  A.  boards  of.  ex- 
aminers are  to  be  congratulated  upon  having  propounded 
such  a  large  number  of  excellent  questions. 

iii 


IV 


PREFACE 
STATES  HAVING  C  P.  A.  LAWS 


State 


C.  p.  A. 

Law 
Enacted 

Number  of  Exam- 
inations Set  to 
January  1, 1914,  of 
Which  Questions 
Are  Available 

Total  Audit 

Questions 

Available 

to  January 

1, 1914 

Total 
Original 

Questions 
Selected 

by  Author 

1896 

35 

525 

309 

1899 

18 

186 

100 

1900 

3 

35 

1 

1901 

1903 

2 

18 

10 

1903 

14 

143 

101 

1904 

5 

10 

4 

1905 

5 

50 

20 

1905 

5 

75 

31 

New  York 

Pennsylvania   (a). 
Maryland    (b).... 

California*    ...... 

Washington    (c). 

Illinois    

New  Jersey   (d).. 

Michigan    (e) 

Florida    

Rhode   Island* 1906 

Utah* 1907 

Colorado    (f) 1907 

Connecticut*    1907 

Ohio 1908 

Louisiana    (g) 1908 

Georgia    (h) 1908 

Montana*   1909 

Missouri    (i) 1909 

Minnesota    1909 

Nebraska*    1909 


10 


6 

61 

18 

1 

13 

4 

1 

10 

4 

2 

24 

19 

4 

63 

21 

•Questions  not  available. 

(a)  Beginning  in  November,  1907,  the  Pennsylvania  board  of  examiners  dis- 
continued setting  questions  under  the  three  subdivisions  of  accountancy  (Theory 
of  Accounts,  Auditing,  and  Practical  Accounting)  and  adopted  the  plan  of  setting 
questions  under  the  one  heading  of  "General  Accounting."  Until  that  time  110 
questions  in  auditing  had  been  set.  Since  that  time  questions  in  auditing  have 
been  included  in  the  general  accounting  examinations.  The  author  has  taken 
from  the  general  accounting  examination  papers  in  1907-1914  such  questions  as 
might  be  included  under  auditing,  consisting  of  76  questions,  of  which  he  has 
selected  56. 

(b)  Questions  prior  to  1909  not  available. 

(c)  Questions  set  by  the  board  of  examiners  of  the  state  of  Washington  are 
available  only  for  the  years  1908  and  1913.  The  former  included  eight  questions 
in  auditing,  of  which  three  were  selected  by  the  author.  The  latter  did  not 
include  questions  under  the  three  usual  headings  (Theory,  Auditing,  and  Practical 
Accounting),  the  board  of  examiners  having  adopted  the  excellent  plan  inaugurated 
by  the  Pennsylvania  board  in  1907,  of  setting  one  examination  in  general  ac- 
counting. From  the  1913  examination  the  author  has  selected  seven  out  of  a 
possible  ten. 

(d)  New  Jersey  questions  are  available  only  for  the  years  1904-1909. 

(e)  Only  five  sets  of  Michigan  C.  P.  A.  questions  are  available,  including  the 
last  one  given  in  1913. 

(f)  Colorado  questions  available  for  1913  only. 

(g)  Louisiana  questions  available  for  1913  only. 

(h)  Selected  questions  from  various  examinations  by  the  Georgia  board  of 
examiners  are  published  in  book  form,  including  ten  questions  in  auditing.  Of 
this  number  the  author  has  selected  four. 

(i)   Missouri  questions  available  for  1912  and  1913  only. 


PREFACE 
STATES   HAVING   C.   P.   A.   LAWS 


Number  of  Exam-  Total  Audit  Total 

C.  P.  A.  inations  Set  to  Questions  Original 

State  Law  January  1, 1914,  of        Available  Questions 

Enacted       Which  Questions        to  January  Selected 

Are  Available  1, 1914  by  Author 

Virginia    1910  3  31  8 

Massachusetts  1910  5  75  30 

West   Virginia* 1911 

Vermontt    1912 

Tennessee*    1913 

Oregon*   1913 

North    Carolina 1913  1  14  9 

North    Dakota! 1913 

Nevadat    1913 

Mainet    1913  1  10  7 

Delaware!   1913 

Wisconsint    1913 

Totals 112  1,353  705 

•Questions  not  available. 

tNo  examinations  set  prior  to  1914.   (First  Maine  examination  held  January  27, 
1914.) 

Taken  collectively,  these  questions  exhaust  practically- 
all  the  fundamental  principles  of  auditing  in  theory  and 
practice,  and  cover  the  subject  very  broadly  in  its  relation 
to  audits,  examinations,  and  special  investigations  of  va- 
rious lines  of  business. 

In  this  latter  field  the  questions  are  perhaps  open  to 
criticism.  In  order  to  answer  all  the  questions  embodied 
in  this  compilation  correctly,  the  accountant  must  be  pre- 
pared to  explain  in  detail  how  to  audit  the  books  and  ac- 
counts of  the  following : 

Trading  (various  lines) 
Manufacturing  (various  lines) 
Fire  insurance  company 
Savings  bank 
Executor  of  an  estate 


VI 


PREFACE 

Building  and  loan  association 

Street  railway  and  electric  lighting  company 

Gas  company 

Trust  company 

National  bank 

Stock  broker 

Municipality 

Commission  house 

Wholesale  dry-goods  company 

Railroad 

Department  store 

Real  estate  development  company 

Life  insurance  company 

Coal  mining  company 

Contractor  and  builder 

Construction  company 

Trustee  of  an  estate 

Theatre 

Milling  company 

Tax  collector's  accounts 

Water  registrar's  accounts 

Accounts  for  professional  men 

Clubs  and  associations 

Grocery  store 

Lumber  company 

Gold  mining  company 

There  are  probably  few  practitioners  who  could  give  an 
authentic  and  detailed  treatise  upon  the  audit  of  each  of 
the  foregoing.  It  does  not  come  within  the  province  of  the 
ordinary  accountant's  professional  experience  to  audit  or 
to  become  familiar  with  the  accounting  methods  of  such  a 
-varied  line  of  activities,  for  the  above  list  covers  a  very 
broad  field. 


PREFACE 


Vll 


Also  the  audit  or  examination  of  national  banks  and 
trust  companies  constitutes  a  specialty,  and  one  who  is  not 
familiar  with  the  inside  workings  of  these  financial  institu- 
tions is  not  prepared  to  carry  on  arn  audit  or  examination  in 
the  most  efficient  manner,  regardless  of  his  professional 
experience  in  other  lines.  The  same  holds  true  with  respect 
to  brokers'  accounts  and  railroad  accounts. 

It  is  the  writer's  contention  that  C.  P.  A.  questions 
should  not  deal  too  much  with  specific  lines  of  business,  nor 
with  exceptions  to  general  practice.  Mercantile  and  manu- 
facturing businesses  furnish  the  great  bulk  of  the  profes- 
sional accountant's  clientele.  To  judge  a  man's  fitness  to 
become  a  C.  P.  A.  through  questions  dealing  with  bank 
examinations,  or  audits  of  brokers'  accounts,  railroad  ac- 
counts, fire  or  life  insurance  accounts,  or  special  rulings 
of  state  or  federal  commissions,  is  to  subject  him  to  a  test 
that  does  not  prove  his  general  fitness,  and  that  places  a 
premium  on  exceptions  to  general  practice.  The  questions 
worth  while  are  the  questions  which  test  one's  knowledge 
of  fundamental  principles,  one's  ability  to  reason  logically, 
and  one's  knowledge  to  carry  out  the  sort  of  work  intelli- 
gently which  a  man  with  the  practical  experience  required 
in  the  C.  P.  A.  law  of  a  given  state  might  reasonably  be 
expected  to  perform. 

Nor  should  the  requirements  for  admission  to  C.  P.  A. 
ranks  be  placed  too  high.  The  general  public  does  not 
consider  that  because  a  young  professional  man  is  permitted 
by  law  to  practice  as  a  lawyer,  physician,  or  dentist,  that 
he  is  as  capable  as  those  of  his  profession  w-ho  have  had  a 
broad  professional  experience;  nor  does  the  general  public 
consider  that  the  title  of  Certified  Public  Accountant  alone 
is  a  conclusive  measure  of  one's  ability  as  an  accountant. 
That  is  a  matter  of  degree  which  no  sort  of  legislation  can 
regulate  beyond  a  fair  starting  point.    The  C.  P.  A.  laws 


viii  PREFACE 

of  our  various  states  do  not,  at  least  by  their  wording,  con- 
template that  candidates  for  the  degree  shall  possess  a 
knowledge  of  accounting  at  all  commensurate  with  that 
of  a  thoroughly  capable  professional  accountant,  else  a 
longer  practical  experience  would  be  required.  Certain  it 
is  that  three  years'  experience  is  not  sufficient  to  develop 
a  broad,  practical  knowledge  of  accountancy  in  all  its 
branches.  It  would  seem,  therefore,  that  if  higher  stand- 
ards are  to  be  set  in  examinations  the  laws  should  be  re- 
vised so  that  the  requirements  for  practical  experience  may 
be  consistent  with  such  raised  standards.  Otherwise  the 
examinations  should  be  prepared  with  the  thought  in  mind 
that  a  matter  of  two  or  three  years'  experience  does  not 
ordinarily  prepare  one  to  answer  questions  which  would 
severely  tax  the  knowledge  of  practitioners  of  ten  years' 
experience. 

It  is  highly  desirable  that  in  each  set  of  C.  P.  A.  ques- 
tions there  should  appear  a  reasonable  number  which  have 
been  included  in  previous  C.  P.  A.  examinations,  especially 
in  connection  with  such  a  technical  and  broad  subject  as 
auditing.  The  boards  of  examiners  are  to  be  praised  for 
their  broad-minded  policy  in  carrying  out  this  important 
feature,  and  in  permitting  their  questions  to  be  made  public. 
It  would  seem  that  any  man  who  can  answer  70  per  cent 
of  the  questions  included  in  this  volume  deserves  a  C.  P.  A. 
degree  in  so  far  as  his  knowledge  of  auditing  is  concerned, 
and  examiners  who  include  in  their  sets  of  questions  50 
per  cent  or  more  of  those  that  have  been  asked  heretofore 
are  giving  the  candidates  a  fair  chance  to  profit  by  studying 
precedents. 

The  boards  of  C.  P.  A.  examiners  have  made  the  subject 
of  auditing  just  what  it  should  be — the  final  summing  up 
of  all  accounting  principles.  Their  finest  efforts  are  shown 
here,  and  of  these  they  may  well  feel  proud. 


PREFACE  ix 

The  writer  wishes  to  express  to  the  various  state  boards 
of  examiners  his  sincere  appreciation  of  their  kindness  in 
furnishing  him  with  the  questions  set  by  them  and  their  pre- 
decessors. Without  their  aid  the  present  compilation  would 
not  have  been  possible. 

Hahry  C.  Bentley 
Boston,  Mass., 
May  1,  1914 


LIST  OF  STATES 


PAGE 

Colorado 185 

Florida 175 

Georgia 194 

Illinois    133 

Louisiana 193 

Maine 225 

Maryland 117 

Massachusetts 213 

Michigan   168 

Minnesota 204 

Missouri 196 

New  Jersey 166 

New  York 11 

North  Carolina 223 

Ohio 187 

Pennsylvania 73 

Virginia 210 

Washington , , 118 


C.  p.  A.  Auditing   Questions 


NEW  YORK 


Question  1 
How  may  it  be  determined  whether  certain  expenditures 
of  a  manufacturing  business  were  of  the  nature  of  main- 
tenance and  repairs  or  constituted  an  actual  betterment  of 
the  plant  ?  State  how  in  each  case  they  should  be  dealt  with 
in  the  balance  sheet  and  in  the  profit  and  loss  account. 

Question  2 
In  auditing  the  accounts  of  a  business  for  the  first  time 
what  books  should  be  produced  ?    What  would  be  the  first 
duty  of  the  auditor  respecting  these  books? 

Question  3 
In  an  audit  stipulating  for  the  examination  of  all  vouch- 
ers of  every  description,  what  would  be  proper  vouchers  for 
the   following:   purchases,  return  purchases,   sales,   return 
sales,  cash  receipts,  cash  payments,  journal  entries? 

Question  4 
Give  a  brief  outline  of  the  duties  of  an  auditor,  and  ©f 
his  responsibilities. 

•  Question  6 

What  means  should  be  employed  to  detect  the  wilful 
omission  to  enter  in  the  books  under  audit,  sales  made  or 
cash  received? 

II 


12  c.  P.  a:  auditing  questions 

Question  6 

What  evidence  should  be  required  as  to  the  correctness 
of  values  of  assets  (other  than  customers'  accounts)  entered 
in  the  books  ? 

Question  7 

State  what  is  necessary  in  auditing  cash  payments,  and 
how  to  prevent  the  reproduction  and  passing  of  vouchers 
a  second  time. 

Question  8 

State  what  examination  should  be  made  of  the  receiv- 
able book  accounts  of  a  firm  or  company  to  ascertain  what 
accounts,  if  any,  should  be  written  off  as  bad. 

Question  9 

In  auditing  the  accounts  at  the  conclusion  of  the  first 
fiscal  year  of  a  corporation  formed  to  acquire  an  established 
business,  what  documents  and  records  should  be  examined 
in  addition  to  the  ordinary  books  and  subjects  of  an  audit? 

Question  10 

To  what  extent  should  an  auditor  hold  himself  respon- 
sible for  the  correctness  of  (a)  inventories,  (b)  pay-rolls, 
(c)  depreciations  and  discounts? 

Question  11 

On  what  basis  should  the  following  assets  be  valued  in 
the  preparation  of  a  balance  sheet:  (a)  manufactured 
goods,  (b)  partially  manufactured  goods,  (c)  raw  mate- 
rial, (d)  open  book  accounts  receivable,  (e)  stocks,  bonds, 
and  other  investments,  (f)  bills  receivable? 


NEW    YORK  13 

Question  12 
State  the  objects  to  be  attained  by  an  audit. 

Question  IS 

How  should  one  proceed  in  order  to  ascertain  that  all 
the  liabilities  are  shown  in  a  balance  sheet? 

Question  I4 

How  should  the  interest  received  on  a  bond  bought  at 
a  premium  be  treated? 

Question  15 

Should  a  reserve  fund  be  invested  in  interest-bearing 
securities?  State  the  custom.  If  so  invested,  what  account 
should  be  credited  with  the  income  ? 

Question  16 

In  an  audit  of  the  accounts  of  a  firm  or  of  a  corpora- 
tion, how  may  the  cash  as  shown  by  the  bank  pass  book  be 
reconciled  with  the  amount  called  for  by  the  cash  book  or 
ledger?  After  this  course  has  been  taken,  is  it  necessary  to 
check  the  pass  book  with  the  deposits  as  shown  by  the  cash 
book  ?    What  might  such  detailed  checking  show  ? 

Question  17 
How  may  fraud  in  payment  of  wages  be  detected  ? 

Question  18 

In  a  statement  of  the  earnings  of  a  business  to  be  sold 
on  the  basis  of  its  earning  capacity,  how  should  the  ques- 
tion of  interest  paid  on  accounts  payable,  on  bills  payable, 
and  on  loans  be  treated? 


14  C.    P.    A.    AUDITING    QUESTIONS 

Question  19 

State  a  method  of  procedure  in  an  examination  of  se- 
curities consisting  of  bonds,  stocks,  and  bills  receivable. 

Question  20 

In  an  audit  of  a  railway  company's  accounts,  how  should 
it  be  determined  that  the  net  earnings  are  correctly  stated? 

Question  21 

State  what  items  may  properly  be  charged  to  Construc- 
tion account,  after  a  railway  has  been  in  operation  for  some 
years. 

Question  22 

In  the  books  of  a  railway  company  what  provision  should 
be  made  for  destroyed  equipment? 

Question  2S 

What  test  should  be  made  of  the  prime  cost  of  man- 
ufactured goods  to  guard  against  loss  of  raw  material 
through  theft  by  employees? 

Questipn  24 

In  an  inventory  .how  sliould  stock  purchased  on  .cr^cdit, 
subject  to  usual  discounts,  be  valued  ? 

':/:■:■  ^\  /.^  :;..>.••■:   ■•       ■    Question,2pj ..  •:,^.  ..,..,.,,.,,.,.,,,   ^.  „^.y 

St2ite  briefly  a  proper  e6ut*se  ;of  procedure^  for  niaki^g  a 
correct  audit  of  the  books  and  accounts  of  (a')  a  manufac- 
turing business,  (b)  a  fire  insurance  company,  (c)  a  banki 


NEW    YORK 


15 


Question  26 

The  check  book  of  a  company  shows  cash  in  bank  $12,- 
500,  bank  pass  book  for  the  same  date  sliows  $14,000 ;  which 
is  correct  and  which  amount  should  be  included  in  the 
balance  sheet? 

Question  27 

Under  what  circumstances  should  deduction  be  made 
for  depreciation?  What  classes  of  assets  are  most  subject 
to  depreciation? 


Question  28 

An  insurance  company  buys  for  investment  $50,000 
7%  10-year  bonds  at  116.  Should  this  purchase  be  entered 
in  the  balance  sheet  at  par  or  at  cost  price?  If  the  latter, 
what  should  be  done  with  the  premium,  in  view  of  the  fact 
that  the  bonds  will  be  paid  off  at  par  at  the  expiration  of 
10  years? 

Question  29 

In  the  case  of  an  audit  of  the  books  of  a  corporation 
where  the  volume  of  transactions  is  so  large  that  a  detailed 
checking  of  postings  and  footings  is  out  of  the  question, 
what  course  should  be  pursued  in  the  examination  in  order 
to  insure  the  correctness  of  the  balance  sheet  ? 

Question  80 

If  in  the  course  of  an  audit  it  should  be  found  that  capi- 
tal expenditures  had  been  charged  up  against  Profit  and 
Loss  account,  or  items  of  expense  against  Improvement 
account,  what  would  be  the  duty  of  the  auditor  in  respect 
to  such  charges  ? 


l6  C.    p.    A.    AUDITING    QUESTIONS 

Question  31 

How  should  goods  sent  out  on  consignment  be  treated 
in  the  books  of  a  company?  When  the  goods  have  been 
sold  and  the  consignee  sends  in  his  account  sales,  what  en- 
tries should  be  made  to  give  effect  to  the  transactions  ? 

Question  82 

If  any  payments  are  received  by  a  company  on  account 
of  work  in  process,  how  should  such  payments  on  account  be 
shown  in  the  balance  sheet  ? 

Question  33 

In  an  audit  of  the  books  of  a  company,  how  may  the 
correctness  of  the  following  items  in  the  balance  sheet  be 
determined:  (a)  outstanding  accounts,  (b)  securities,  (c) 
inventory  of  finished  stock  and  raw  materials,  (d)  bank 
balances,  (e)  creditors'  open  accounts,  (f)  creditors'  bills 
payable  ? 

Question  SJf 

A  company  has  caused  to  be  made  a  revaluation  of  its 
buildings,  plant,  and  machinery,  and  it  is  found  that  the  new 
values  are  greater  than  those  shown  by  the  books;  what 
does  this  larger  value  indicate,  and  how  should  such  excess 
be  treated  in  the  books  of  the  company?  What  entries 
should  be  made  to  give  effect  to  these  conditions  in  (a)  the 
balance  sheet,  (b)  the  profit  and  loss  account? 

Question  35 

A  manufacturing  corporation  desires  a  certificate  of  its 
average  annual  profits  for  three  years ;  after  charging  up  all 
costs,  expenses,  and  depreciation,  and  an  allowance  for  bad 


NEW    YORK 


17 


debts,  it  is  found  that  the  profits  for  the  first  year  were  $62,- 
000,  for  the  second  year  $64,000  plus  $10,500  profit  on  sale 
of  investments,  and  for  the  third  year  $72,000  plus  $8,400 
profit  on  the  sale  of  real  estate.  Give  the  annual  average 
profit  to  be  certified. 

Question  36 

In  some  kinds  of  business  the  expenditure  on  repairs 
and  renewals  account  varies  considerably  from  year  to  year ; 
how  should  this  expenditure  be  dealt  with  in  the  books  of 
the  company  so  that  the  profits  need  not  fluctuate  by  reason 
of  this  variable  expenditure? 

Question  37 

In  an  audit  of  the  books  of  a  company  it  is  found  that 
the  president's  salary  account  is  credited  with  a  bonus  of 
$5,000  for  "extra  services,"  in  addition  to  the  usual  salary 
paid  him ;  what  steps  should  be  taken  to  ascertain  that  this 
item  is  correct? 

Question  38 

The  Profit  and  Loss  account  of  a  manufacturing  com- 
pany for  six  months  ending  June  30,  1896,  contains  on  the 
debit  side,  (a)  stock  on  hand  January  1,  1896,  (b)  pur- 
chases of  raw  material,  (c)  manufacturing  expenses,  (d) 
expenses  of  selling;  on  the  credit  side,  (e)  sales,  (f)  stock 
on  hand  June  30.  Does  the  balance  of  these  amounts  con- 
stitute the  net  profit  for  the  six  months,  or  should  other 
charges  be  taken  into  account?    If  so,  state  them. 

Question  39 

An  audit  of  a  set  of  books  for  the  half  year  ending  De- 
cember 31  is  begun  January  26;  what  course  should  be 
pursued  to  prove  the  correctness  of  the  cash  on  hand  Decem- 
ber 31  ? 


l8  C.    p.    A.    AUDITING    QUESTIONS 

Question  40 

How  should  doubtful  debts  be  treated  in  a  balance 
sheet?  Give  a  convenient  method  of  ascertaining  whether 
accounts  receivable  are  good,  bad,  or  doubtful. 

Question  Jfl 

How  should  leases  be  treated  in  the  balance  sheet  and 
in  the  profit  and  loss  account  of  a  company  ? 

Question  42 

State  which  of  the  following  should  be  charged  to  Capi- 
tal account  and  which  to  Revenue  account:  (a)  repairs  to 
machinery  and  plant,  (b)  replacements  of  plant,  (c)  new 
plant  purchased,  (d)  cost  of  leasehold  premises,  (e)  part- 
ners' salaries. 

Question  43 

A  manufacturing  company  takes  out  and  sells  a  quantity 
of  old  machinery  and  replaces  it  by  new ;  what  accounts 
should  be  credited  with  the  proceeds  of  the  sale?  Give 
reasons. 

Question  44 

Differentiate  as  fully  as  possible  a  Manufacturing  ac- 
count, a  Trading  account,  and  a  Profit  and  Loss  account, 
and  state  what  the  balance  in  each  case  indicates. 

Question  45 

How  should  the  loss  on  shares  issued  at  a  discount  be 
dealt  with  in  the  accounts  of  a  corporation? 

Question  4^ 

In  examining  the  books  and  accounts  of  a  business  for 
the  purpose  of  giving  a  certificate  of  the  net  profits  earned 


NEW    YORK  ig 

for  a  number  of  years,  how  should  interest  paid  on  partners' 
capital  be  treated?  What  other  important  points  should 
receive  attention  in  order  to  state  the  profits  net  ? 

Question  J^7 

How  may  the  auditor  know  that  the  balance  sheet  and 
profit  and  loss  account  of  a  corporation  whose  books  he 
has  audited  include  all  income  and  expenditures  applicable 
to  the  year  under  review? 

Question  k8 

In  a  large  dry-goods  business  it  is  considered  necessary 
to  divide  the  bookkeeping  in  such  a  way  that  each  ledger 
shall  be  balanced  separately ;  how  should  this  be  done  ? 

Question  Jf9 

Is  a  trial  balance  the  same  as  a  balance  sheet?  If  not,  in 
what  way  does  it  diflfer  ? 

Question  50 

A  partnership  contract  between  A  and  B  provides  that 
each  partner  shall  contribute  $25,000  to  a  new  business,  and 
that  on  any  capital  brought  in  by  either  partner  in  excess  of 
this  amount  he  shall  receive  6%.  A  contributes  $10,000 
additional,  and  the  bookkeeper  makes  an  entry  in  the  books 
at  the  end  of  the  year  crediting  A  with  6%  on  $10,000, 
viz.,  $600,  which  is  debited  to  B.  Is  this  correct?  Give 
reasons. 

Question  51 

What  course  should  be  adopted  in  an  audit  of  the  books 
of  a  firm  where  defalcations  are  suspected? 


20  C.    P.    A.    AUDITING    QUESTIONS 

Question  52 

What  is  the  significance  of  an  auditor's  certificate  of 
profits  of  a  business  about  to  be  sold  to  a  new  company? 
To  what  extent  is  an  auditor  responsible,  morally  and  le- 
gally, for  his  certificates? 

Question  68 

State  what  an  auditor  should  do  to  ascertain  if  the  fol- 
lowing assets,  appearing  in  a  balance  sheet,  are  taken  at  a 
fair  value:  (a)  merchandise,  (b)  machinery,  (c)  real  estate. 

Question  5Jf. 

State  what  means  should  be  employed  to  ascertain  if 
the  following  assets  were  properly  included  in  a  balance 
sheet  at  the  valuation  given:  (a)  stocks  and  bonds,  (b) 
bills  receivable,  (c)  accounts  receivable. 

Question  55 

How  may  an  auditor  know  that  the  credits  for  mer- 
chandise returned  are  bona  fide,  and  not  made  to  conceal 
a  shortage  in  cash  ? 

Question  56 

What  classes  of  salaries  and  wages  should  be  charged 
directly  against  the  cost  of  manufacture?    Give  reasons. 

Question  57 

How  should  the  right  to  remuneration  claimed  by  offi- 
cers and  directors  of  a  corporation  be  verified  ? 

Question  58 

How  should  the  bank  balance  appearing  in  the  books  of 
a  company  be  verified  by  the  auditor? 


NEW    YORK  21 

Question  59 

To  what  should  the  discount  on  bonds  sold  for  con- 
struction and  the  expense  of  disposing  of  such  bonds  be 
charged?    Give  reasons. 

Question  60 

Under  what  circumstances  should  paid  checks  be  treated 
as  vouchers  ?  Are  checks  proper  and  sufficient  vouchers  for 
purchases?    Give  reasons. 

Question  61 

What  books  of  a  corporation,  in  addition  to  the  ordinary- 
trade  books,  should  be  inspected  by  the  auditor  ?    Why  ? 

Question  62 

In  auditing  the  books  of  a  company  for  the  first  time 
after  a  reorganization,  what  should  an  auditor  do  to  verify 
the  opening  entries?    Give  reasons. 

Question  63 

How  may  the  auditor  ascertain  the  profits  for  a  given 
period  from  the  books  of  a  company  kept  on  a  system  of 
single  entry? 

Question  6J/. 

Is  it  the  duty  of  an  auditor  of  a  bank  actually  to  inspect 
the  securities  representing  the  bank's  investments?  If  so, 
what  course  should  be  adopted  in  conducting  such  exami- 
nation ? 

Question  65 

In  the  event  of  such  a  difYerence  of  opinion  between 
auditor  and  directors  concerning  the  rate  of  depreciation 
on  plant  and  machinery  as  would   involve  an  important 


22  C.    P.    A.    AUDITING    QUESTIONS 

alteration  in  the  proposed  rate  of  dividend,  hoAv  can  the 
matter  be  settled  to  the  satisfaction  of  both  parties  ? 

Question  66 

Is  it  a  part  of  the  duties  of  the  auditor  of  the  accounts 
of  a  stock  company  to  consider  the  question  of  depreciation 
on  assets,  buildings,  machinery,  plant,  etc.?  Give  reasons 
for  your  answer. 

Question  67 

In  examining  cash  vouchers  in  the  course  of  an  audit, 
is  it  necessary  to  place  your  initials  or  some  other  distinctive 
mark  on  each,  and,  if  so,  why? 

Question  68 

If  the  cash  in  hand  of  a  firm  or  company  under  audit 
consists  in  part  of  checks  received  from  customers  but  not 
deposited  in  bank,  how  may  the  auditor  assure  himself  that 
such  checks  are  properly  included? 

Question  69 

Describe  your  mode  of  procedure  in  connection  with 
some  audit  on  which  you  have  been  engaged.  Relate  the 
nature  of  the  business,  answering  in  sufificient  detail  to 
enable  the  examiners  to  form  an  opinion  regarding  your 
knowledge.     Define  auditing. 

Question  70 

What  is  the  value  of  a  bank  pass  book  for  the  purposes 
of  an  audit?  To  what  extent  should  it  be  taken  as  a 
voucher  for  cash  book  entries,  or  for  the  balance  carried 
forward  ? 

Question  71 

Is  there  any  satisfactory  method  of  auditing  accounts 
not  kept  by  double  entry?    If  so,  illustrate  the  method. 


NEW    YORK 


Question  72 


23 


In  auditing  the  accounts  of  a  private  firm  where  there 
are  several  partners,  to  what  points  should  the  auditor  look 
in  order  to  be  assured  that  the  partners'  accounts  are  cor- 
rectly stated  in  the  balance  sheet  ? 

Question  73 

State  generally  your  views  as  to  what  constitutes 
capital  expenditure  and  expenditure  properly  chargeable 
against  revenue.  Under  what  circumstances  would  an 
auditor  be  justified  in  refusing  his  certificate  of  audit  ? 

Question  7-4 

An  auditor  has  to  audit  the  accounts  of  a  firm  or  com- 
pany which  is  a  large  employer  of  labor,  fixed  and  extra; 
state  (a)  what  vouchers  the  auditor  should  expect  to  find, 
and  in  the  case  of  the  extra  labor,  how  such  vouchers  should 
be  certified,  (b)  what  course  the  auditor  should  recommend 
his  client  to  adopt  to  make  sure  that  there  were  no  "dead 
men"  charged  on  the  fixed  lists. 

Question  75 

What  reserves  should  the  auditor  expect  to  find  set  aside 
out  of  income,  besides  those  for  bad  debts  and  discounts,  in 
the  case  of  (a)  a  steamship  company,  (b)  a  telegraph  com- 
pany ? 

Question  76 

When  an  auditor  employed  to  adjust  the  accounts  of  a 
firm  finds  that  the  current  work  is  behind  and  that  no  trial 
balance  has  been  made  for  over  a  year,  what  course  should 
he  pursue,  having  regard  for  his  own  interests  as  well  as 
for  those  of  the  firm  ? 


24  C.    P.    A.    AUDITING    QUESTIONS 

Question  77 

How  should  the  auditor  treat  a  company's  accounts 
with  its  several  agencies  at  the  end  of  the  fiscal  year,  each 
agency  having  been  charged  with  all  of  the  goods  shipped 
to  it,  and  each  having  some  stock  remaining  on  hand  ? 

Question  78 

If  you  were  called  in  to  investigate  the  books  of  account 
of  a  manufacturing  concern  that  contemplated  selling  its 
business  to  a  corporation,  and  were  required  tO'  report  on 
the  net  profits  of  the  past  five  years,  what  would  be  your 
course?  How  would  you  ascertain  the  value  of  the  plant 
and  machinery,  and  of  other  assets  that  might  affect  the  net 
profits  of  the  period  under  review?  Give  an  indication  of 
the  report  you  would  make. 

Question  79 

In  making  up  the  balance  sheet  of  a  firm  or  corporation, 
how  should  the  auditor  treat  goods  that  (a)  have  been  sent 
abroad  on  consignment  and  remain  unsold,  (b)  are  in  the 
hands  of  agents  at  home,  (c)  have  been  sent  out  on  "sale  or 
return"  ? 

Question  80 

You  are  called  in  to  examine  the  books  of  a  firm  whose 
bookkeeper  and  cashier  has  absconded.  He  is  known  to 
be  an  embezzler  to  the  amount  of  at  least  $2,000.  The 
books  have  been  kept  by  double  entry  and  are  apparently 
correct.  How  would  you  proceed  to  determine  the  total 
amount  of  the  embezzlement?  Mention  the  different 
methods  that  the  embezzler  might  have  used  to  hide  his 
stealings? 


NEW    YORK  25 

Question  81 

Should  the  auditor  of  a  firm  or  corporation  revise  the 
form  and  wording  of  the  balance  sheet  to  which  his  certifi- 
cate is  to  be  attached  ?    Give  reasons. 

Question  82 

Give  reasons  for  or  against  the  necessity  of  an  auditor's 
verifying  the  stock  ledger  of  a  corporation. 

Question  83 

In  balancing  a  set  of  books  consisting  of  cash  book, 
purchase  book,  sales  book,  journal,  and  ledger,  the  debit 
side  of  the  trial  balance  is  found  to  be  $87.19  in  excess  of 
the  credit  side;  how  should  the  error  be  sought? 

Question  8Jf 

Describe  the  steps  necessary  to  make  a  complete  audit 
of  a  savings  bank. 

Question  85 

Describe  the  processes  of  verifying  the  cash  book  of  a 
partnership  or  company  by  means  of  the  bank  transactions. 

Question  86 

The  YCX  Co.  takes  a  large  number  of  notes  (bills  re- 
ceivable) from  its  customers,  and  when  in  need  of  funds 
discounts  or  sells  them ;  how  may  the  accounts  be  managed 
so  as  to  show  the  company's  liability  as  indorser  on  the 
paper  discounted? 

Question  87 

The  machinery  used  by  a  firm  has  been  purchased  on  the 
instalment  plan,  with  monthly  payments,   and  under  the 


26  '  C.    p.    A.    AUDITING    QUESTIONS 

stipulation  that  the  title  shall  pass  only  when  the  last  pay- 
ment has  been  made.  At  the  close  of  the  fiscal  year  there 
are  yet  several  payments  to  be  made.  The  firm  also  pays  a 
royalty  on  the  output  of  some  of  the  machines  secured  on 
this  plan.  How  should  the  auditor  in  his  annual  statement 
deal  with  the  machinery,  the  instalments  paid,  and  the 
royalty  ? 

Question  88 

Is  it  an  auditor's  duty  to  concern  himself,  to  any  extent, 
with  the  validity  of  the  transactions  that  come  under  his 
notice?    Explain. 

Question  89 

In  auditing  a  private  banking  institution,  how  would 
you  ascertain  the  amount  of  checks  that  have  been  charged 
to  depositors'  accounts,  but  not  presented  for  payment? 

Question  90 

In  preparing  the  balance  sheet  of  a  business  at  the  close 
of  a  year,  how  should  each  of  the  following  be  treated :  (a) 
bad  and  doubtful  debts,  (b)  premiums  for  fire  insurance 
unexpired,  (c)  interest  paid  in  advance  on  bills  payable  dis- 
counted, (d)  depreciation  of  factory  plant,  store  and  office 
fixtures,  and  similar  items  ? 

Question  91 

Write  in  proper  form  an  auditor's  certificate  of  cor- 
rectness. 

Question  92 
Under  what  circumstances,  if  any,  would  it  be  proper  to 
open  an  account  with  good-will?    On  finding  a  good-will 


NEW    YORK 


27 


account  on  the  ledger  of  a  business  for  which  you  are  to 
prepare  the  annual  statement,  how  would  you  treat  the 
account,  or  what  special  adjustment  would  you  suggest  in 
regard  to  it? 

Question  93 

What  check  has  the  auditor  on  fictitious  entries  showing 
purchases,  and  on  returns  of  goods  sold? 

Question  9J/. 

In  auditing  the  accounts  of  a  gas  company,  what  evi- 
dence of  the  receipt  of  amounts  due  from  customers  should 
be  required  ? 

Question  95 

Should  any  fluctuation  in  the  valuation  of  permanent 
assets  be  permitted  to  affect  the  result  of  the  Loss  and  Gain 
account?    Give  reasons  for  your  answer. 

Question  9S 

Expenditures  are  made  by  a  corporation  for  items  of 
each  of  the  following  classes:  (a)  taking  down  a  machine 
in  one  part  of  a  factory,  moving  it,  and  putting  it  up  in 
another  part,  (b)  expenses  of  incorporating  the  company, 
including  state  charges  and  lawyer's  services,  (c)  broker- 
age on  purchase  of  a  piece  of  property,  (d)  commission  on 
an  issue  of  debenture  bonds,  (e)  costs  attending  a  mort- 
gage, (f)  furniture  and  fittings  of  a  city  office  and  sales- 
room, (g)  costs  of  patents,  including  solicitor's  charges  and 
government  fees.  Which  items  should  be  charged  to  capital 
and  which  to  revenue?  State  reasons  for  your  answer  in 
each  case. 

Question  97 

Assuming  that  you  are  limited  as  to  time  and  fee  in  an 


28  C.    p.    A.    AUDITING    QUESTIONS 

audit  embracing  numerous  personal  accounts  contained  in 
one  general  ledger,  state  precisely  the  steps  you  would  adopt 
in  each  case  to  verify  cash,  sales,  purchases,  customers, 
creditors. 

Question  98 

What  proportion  of  $15,000 — commission  paid  for  ne- 
gotiating a  sale  of  bonds,  to  run  10  years — should  be  treated 
as  an  asset  at  the  end  of  the  first  year  ?    Give  reasons. 

Question  99 

What  v^ould  you  consider  a  satisfactory  voucher  for 
wages  paid  in  a  manufacturing  business  ? 

Question  100 

In  an  audit  of  a  business  in  which  discounts  are  freely 
given  and  received  and  the  accounts  are  charged  and  cred- 
ited in  gross,  what  general  check  should  be  adopted  in  veri- 
fication of  (a)  discounts  allowed,  (b)  discounts  received? 

Question  101 

Given  the  following  reconciliation  of  cash  at  the  close 
of  an  audit,  state  categorically  how  it  may  be  verified : 

June  30,  cash  on  hand  as  per  cash  book .$8,549.17 

Balance  as  per  bank  pass  book  at  the 

close  of  business $16,549.72 

Add  check  of  J.  B.  Jones,  not  de- 
posited      1,450.00 

$17,999.72 
Deduct  checks  drawn,  not  presented.  .   10,154.29 

$  7,845.43 
Cash  in  drawer 703.74  $8,549.17 


NEW    YORK 


Question  102 


29 


State  generally  what  constitutes  capital  expenditures  in 
each  of  the  following  cases:  (a)  a  manufacturing  com- 
pany, (b)  a  gas  company,  (c)  a  charitable  institution. 

Question  lOS 

To  what  documents  should  the  auditor  have  access  in 
each  of  the  following  cases:  (a)  partnership  accounts,  (b) 
trustees'  accounts?    Why? 

Question  10  Jf 

In  commencing  an  audit,  say  three  months  after  the 
close  of  a  fiscal  year,  how  would  you  verify  cash  on  hand 
and  bills  receivable  as  they  should  stand  at  the  end  of  such 
fiscal  year? 

Question  105 

State  the  special  uses  to  which  an  auditor  may  put  con- 
trolling ledger  accounts,  such  as  Customers'  Ledger  account, 
and  Purchase  Ledger  account. 

Question  106 

State  what  means  should  be  adopted  to  verify  (a)  cash 
sales,  (b)  discounts  allowed,  (c)  discounts  received,  (d) 
sold  goods  returned,  (e)  allowances  on  sales. 

Question  107 

A  corporation  sells  its  first  mortgage  bonds  at  $10,000 
premium  and  its  second  mortgage  bonds  at  $10,000  dis- 
count. Give  your  views  as  to  the  proper  treatment  of  these 
items  of  premium  and  discount. 


30  C.    p.    A.    AUDITING    QUESTIONS 

Question  108 

Without  definite  instructions,  what,  in  your  judgment, 
would  constitute  a  thorough  and  proper  audit  of  a  set  of 
books  ? 

Question  109 

What  evidence  should  the  auditor  require  as  to  the 
authority  given  to  officials  of  a  municipal  corporation  to 
expend  money?  State  what  methods  should  be  used  in 
auditing  the  actual  payments. 

Question  110 

How  should  the  accountant  proceed  if  required  to  audit 
the  accounts  of  a  firm  which  kept  only  a  cash  book  and 
journal,  but  had  preserved  all  the  invoices  and  vouchers 
pertaining  to  the  business  ? 

Question  111 

State  briefly  your  views  as  to  the  question  of  deprecia- 
tion of  assets,  and  the  rule  which  you  adopt  in  regard  to  it. 
What  rate  would  you  apply  to  plant  and  machinery,  and 
furniture  and  fixtures? 

Question  112 

What  are  the  principal  points  to  which  attention  should 
be  given  in  ascertaining  the  amount  of  the  net  earnings  of  a 
company  desiring  to  use  your  certificate? 

Question  113 

What  is  meant  by  the  term  sinking  fund?  Show  how 
a  sinking  fund  is  opened  or  established,  and  explain  its 
operation  from  year  to  year. 


NEW    YORK  31 

Question  llJf. 

Explain  the  difference  between  an  account  of  receipts 
and  payments  and  an  account  of  income  and  expenditure. 

Question  115 

In  auditing  the  books  of  a  building  and  loan  association, 
what  method  should  be  used  in  verifying  (a)  depositors' 
pass  books,  (b)  mortgages  held  by  the  association,  (c)  the 
income  ? 

Question  116     , 

How  should  the  auditor  deal  with  the  ledger  accounts 
of  partners  (a)  in  the  division  of  profits,  (b)  in  the  assess- 
ment of  losses,  (c)  in  case  a  partner's  drawings  exceed  the 
amount  specified  in  the  partnership  agreement,  (d)  in  case 
a  partner's  drawings  are  less  than  the  amount  to  which  he 
is  entitled? 

Question  117 

What  routine  would  you  recommend  in  the  checking  of 
invoices  of  goods  or  materials  purchased? 

Question  118 

What  rules  would  you  recommend  foi  localizing  the 
errors  in  a  trial  balance? 

Question  119 

A  company  manufacturing  a  proprietary  article  offers 
certain  premiums  to  its  customers  on  the  return  of  its  wrap- 
pers, the  premiums  offered  being  indicated  in  a  published 
schedule.  At  the  time  of  making  out  the  annual  balance 
sheet,  only  a  few  of  the  premiums  have  been  distributed. 
How  should  this  matter  be  treated  in  the  balance  sheet  ? 


32  C.    P.    A.    AUDITING    QUESTIONS 

Question  120 

In  the  case  of  a  company  which  has  issued  preferred 
stock  carrying  a  cumulative  dividend,  but  has  not  earned 
enough  to  pay  such  dividend  in  full  for  several  years,  how 
would  you  deal  with  the  arrears  of  dividends  due,  if  at  all, 
on  the  company's  balance  sheet  ?    Give  reasons. 

Question  121 

Explain  the  difference  between  capital  expenditure  and 
revenue  expenditure.  What  rule  controls  in  determining 
whether  certain  payments  belong  to  capital  or  to  revenue? 
When  in  doubt,  to  which  should  the  payment  be  charged  ? 

Question  122 

In  an  audit  of  the  books  of  a  corporation  using  the 
voucher  system,  what  means  should  be  adopted  to  prevent 
the  reproduction  of  vouchers  already  passed,  in  cases  where 
the  auditor  is  not  permitted  to  deface  the  vouchers  by 
stamps  or  writing? 

Question  123 

Describe  in  detail  the  method  that  should  be  used  to 
verify  the  securities  representing  the  investments  of  a  com- 
pany under  audit  in  the  case  of  (a)  real  estate,  (b)  mort- 
gages on  real  estate,  (c)  certificates  of  stock,  (d)  railway 
bonds. 

Question  12Jf 

An  auditor,  on  completion  of  his  work,  certifies  that 
the  accounts  are  correct  in  accordance  with  the  books.  Is 
this  form  of  certificate  subject  to  criticism,  and,  if  so,  why? 


NEW    YORK  33 

Question  125 

What  is  meant  by  a  Suspense  account?  Give  three  ex- 
amples of  items  carried  to  Suspense  account,  and  state  how 
they  may  be  removed  from  that  account. 

Question  126 

After  auditing  the  books  of  a  manufacturer  annually  for 
a  period  of  ten  years,  you  are  asked  to  render  a  certificate 
as  to  the  net  earnings  of  the  business  for  those  ten  years, 
for  the  purpose  of  a  sale  based  on  the  earning  capacity  of 
the  property.  What  items  of  expense  heretofore  charged 
annually  through  the  Profit  and  Loss  account  may  be  prop- 
erly eliminated  in  the  preparation  of  your  certificate,  and 
why? 

■Question  127 

Explain  two  methods  by  which  depreciation  on  build- 
ings, machinery,  and  plant  may  be  stated  in  the  books  of 
account.    State  which  method  you  prefer  and  give  reasons. 

Question  128 

When  auditing  the  books  and  accounts  of  a  concern 
operating  a  large  machine  shop,  you  find  that  the  machinery 
and  tools  have  been  regularly  depreciated  each  year,  that 
their  value  as  shown  by  the  books  is  considerably  less  than 
the  value  shown  by  an  independent  appraisal,  and  that  the 
firm  has  set  up  the  higher  values  as  shown  by  the  appraisal 
on  the  books.  To  what  account  would  you  recommend  the 
corresponding  credit  to  go  and  for  what  reasons? 

Question  129 

Draft  a  bank  reconcilement  account,  dealing  with  checks 
outstanding,  not  cleared. 


34  C.    P.    A.    AUDITING    QUESTIONS 

Question  ISO 

Describe  the  various  steps  to  be  taken  in  auditing  the 
accounts  of  an  executor  for  the  first  year  after  the  death  of 
the  testator. 

Question  131 

It  is  found  in  an  audit  that  certain  merchandise  shipped 
to  an  agent  for  sale  has  been  charged  to  his  personal  account 
and  credited  to  sales.     Make  correcting  entries. 

Question  132 

What  is  the  difference  between  a  reserve  and  a  reserve 
fund?    Give  examples  of  each. 

Question  133 

What  points  require  special  attention  in  examining  bills 
receivable  at  the  end  of  a  fiscal  period  ? 

Question  13Jf. 

State  your  views  as  to  the  functions  of  the  journal.  In 
what  does  it  differ  from  the  cash  book? 

Question  135 

State  your  method  of  verifying  the  Bills  Receivable  ac- 
count. Does  the  balance  of  acceptances  unmatured  affect 
the  Bad  and  Doubtful  Debts  account,  and  if  so,  how? 
What  evidence  would  you  require  of  the  dishonor  of  an 
acceptance  ? 

Question  136 

In  auditing  the  accounts  of  Bruce  &  Co.,  you  find  that 
a  dishonored  acceptance  of  Andrews  for  $2,500  is  included 


NEW    YORK  35 

in  bills  receivable  balance.     If  this  is  not  correct  state  how 
it  should  have  been  treated. 

Question  137 

A  client  who  has  a  beneficial  interest  in  the  corpus  of  an 
estate  employs  an  accountant  to  conduct  a  complete  audit. 
State  the  points  on  which  the  accountant  should  particularly 
report. 

Question  138 

To  what  extent  would  you,  as  auditor,  concern  yourself 
in  the  matter  of  depreciation  allowances? 

Question  139 
How  should  the  discount  and  premium  arising  from  the 
sale  of  a  company's  own  securities  held  in  its  treasury  be 
treated  on  the  books  ?    Give  examples. 

Question  1J/.0 
Mention  several  transactions  which,  in  an  audit  of  the 
accounts  of  a  village,  would  require  inspection  of  the  official 
minutes  for  verification. 

Question  lJf.1 
In  what  cases,  if  any,  should  checks  be  regarded  as  in- 
sufficient vouchers  for  the  payment  of  bills  ? 

Question  11^2 
If,  in  the  course  of  an  audit,  it  is  found  that  the  balance 
shown  by  the  bank  pass  book  agrees  with  the  balance  shown 
in  the  cash  book  after  all  outstanding  checks  have  been 
taken  into  consideration,  should  this  be  deemed  conclusive 
evidence  of  the  correctness  of  the  bank  balance?  If  not, 
what  further  evidence  should  be  required? 


36  C.    p.    A.    AUDITING    QUESTIONS 

Question  1J/-3 

Give  examples  of  such  assets  and  liabilities,  not  usually 
found  on  books  of  account,  as  should  be  considered  by  the 
auditor  when  preparing  an  income  and  profit  and  loss 
account  at  the  close  of  a  fiscal  period. 

Question  IJt-Jf 

What  method  should  be  adopted  to  verify  the  correct- 
ness of  amounts  paid  by  a  corporation  for  (a)  directors' 
fees,  (b)  agents'  and  salesmen's  commissions? 

Question  lJf.5 

What  special  considerations  would  influence  you  in  fix- 
ing the  rate  of  depreciation  chargeable  on  (a)  buildings, 
(b)  machinery,  (c)  tools  and  fixtures,  (d)  patterns? 

Question  1J^6 

In  making  an  audit  of  a  firm's  books  for  the  purpose  of 
certifying  the  annual  profits  for  a  period  of  years  and  with 
a  view  to  its  conversion  into  a  corporation,  what  items  of 
earnings  and  expenses  should  be  omitted  which  would  ordi- 
narily be  included  in  its  regular  annual  profit  and  loss 
account  ? 

Question  1^7 

In  making  a  first  audit  of  the  accounts  rendered  by  an 
executor,  what  documents  would  be  required  to  enable  the 
auditor  to  properly  perform  his  duty  ? 

Question  IJfS 

In  a  manufacturing  and  profit  and  loss  account  pre- 
pared from  a  trial  balance  submitted  by  your  client  and 


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37 


verified  by  you,  what  expense  accounts  would  you  charge 
in  the  manufacturing  account,  and  what  in  the  profit  and 
loss  account?  (Refer  to  any  manufacturing  business  with 
which  you  are  familiar.) 

Question  IJ^Q 

How  would  you  proceed  to  audit  the  transactions  of  a 
business  for  which  no  cash  book,  journal,  or  ledger  had  been 
kept  ? 

Question  150 

What  safeguards  in  accounting  would  you  suggest  to  a 
client  to  prevent  loss  of  stock  by  theft? 

Question  151 

What  can  an  auditor  do  to  verify  (a)  inventories  and 
(b)  pay-rolls? 

Question  152 

Should  provision  be  made  out  of  revenue  to  provide  for 
discount  on  accounts  payable  outstanding  after  the  date  of 
closing?    Give  reasons  for  your  answer. 

Question  153 

A  firm  resolves  itself  into  a  corporation  in  which  new 
capital  is  to  be  interested.  How  would  the  auditor  ascer- 
tain the  value  of  the  good-will? 

Question  15Jf. 

A  house  sends  out  many  goods  on  approval  and  treats 
the  transactions  as  sales.  How  should  such  items  be  treated 
by  the  auditor  when  setting  up  statements  for  a  period  ? 


38  C.    P.    A.    AUDITING    QUESTIONS 

Question  155 

A  firm  is  worth  $100,000  above  all  liabilities,  and  esti- 
mates its  good-will  at  $50,000.  A  contract  is  made  to  con- 
vey all  its  assets,  inclusive  of  good-will  and  subject  to  lia- 
bilities, for  $150,000  of  capital  stock.  You  are  asked  to 
prepare  a  statement  for  taxation,  and  as  good-will  is  not 
taxable  for  city  and  county  purposes,  it  is  sought  to  increase 
the  amount  of  that  item  on  the  books  and  to  reduce  corre- 
spondingly the  value  of  other  assets,  on  the  ground  that  the 
business  is  profitable  and  the  good-will  really  worth  more 
than  the  account  shows.  What  should  the  auditor  do  under 
such  circumstances? 

Question  156 

The  year's  cash  receipts  of  a  corporation  were  $250,- 
625.16,  disbursements  $110,328.28.  Are  the  directors  war- 
ranted in  declaring  a  dividend  on  the  presentation  of  these 
facts  alone  ?    Give  reason  for  your  answer. 

Question  157 

It  is  agreed  by  the  directors  of  a  manufacturing  com- 
pany that  certain  depreciation  should  be  allowed,  but  that 
it  is  desirable  to  let  the  plant  accounts  stand  on  the  books 
at  cost  value.  How  would  you  as  auditor  manage  to  meet 
the  situation  ? 

Question  158 

In  an  audit  of  the  accounts  of  a  corporation  should  the 
auditor  accept  as  conclusive  the  certificate  of  the  registrar 
of  the  stock  as  to  the  total  amount  of  capital  stock  out- 
standing?   If  not,  why  not? 

Question  159 

A  construction  company  has  a  number  of  contracts 
partly  completed  at  the  close  of  its  fiscal  year.    Would  you 


NEW    YORK  3Q 

carry  any  portion  of  the  anticipated  profit  on  these  contracts 
into  Revenue  account?    If  so,  why? 

Question  160 

A  company  receives  a  premium  on  its  own  capital  stock. 
What  account  should  receive  credit  for  the  premium?  Is 
this  premium  available  for  the  payment  of  dividends  ?  Give 
reasons  to  sustain  your  answer. 

Question  161 

What  course  should  be  pursued  in  an  audit  where  it 
is  impossible,  owing  to  the  great  volume  of  business,  to 
check  the  postings  to  subsidiary  ledgers  ? 

Question  162 

State  generally,  what  goes  to  make  up  in  a  mercantile 
house  (a)  the  Trading  account,  (b)  the  Profit  and  Loss 
account. 

Question  163 

A  company  gives  more  or  less  attention  to  its  plant.  Is 
it  proper  to  enter  the  whole  outlay  against  the  capital?  If 
not,  could  the  outlays  be  spread  over  a  period  of  years? 
Would  a  revaluation  of  the  plant  be  a  proper  solution  of 
the  matter?    Explain. 

Question  16  Jf 

A  firm  is  indebted  to  one  of  its  creditors  in  the  sum  of 
$45,000.  The  creditor  agrees  to  accept  notes  with  good 
indorsements  for  $50,000  in  full  settlement  of  the  account, 
with  the  understanding  that  if  any  payment  is  not  made 
at  maturity,  the  whole  debt,  less  such  sum  as  may  have  been 


40  C.    p.    A.    AUDITING    QUESTIONS 

paid,  shall  be  declared  to  be  due  by  the  creditor.  After  con- 
cluding this  arrangement  the  firm  is  succeeded  by  a  cor- 
poration. The  agreement  covering  the  turnover  provides 
that  all  debts  of  the  firm  shall  be  paid  by  the  corporation. 
Only  the  indorsed  notes  for  $50,000  are  brought  into  the 
books  of  the  company,  and  nothing  is  said  regarding  the 
agreement  heieinbefore  referred  to  respecting  the  original 
debt.  You  are  asked  to  certify  to  the  accounts  thus  set  up. 
What  course  would  you  pursue  ? 

Question  165 

An  individual  buys  a  fleet  of  ships.  He  then  forms  a 
corporation  to  take  them  over  at  double  the  sum  paid  by 
him,  payable  one-half  in  debenture  bonds  of  the  company, 
and  one-half  in  its  capital  stock.  A  sinking  fund  is  to  be 
provided  for  the  gradual  retirement  of  the  debenture  bonds. 
A  public  accountant  is  called  in  at  the  end  of  five  years  to 
make  up  the  accounts.  He  insists  on  creating  a  depreciation 
fund  based  on  the  full  consideration  paid  by  the  corporation. 
The  directors  argue  that  the  depreciation  fund  should  be 
based  on  the  amount  of  debenture  bonds  issued,  on  the 
theory  that  the  capital  stock  issued  to  the  vendor  was  in  the 
nature  of  a  bonus  and  did  not  represent  any  real  value. 
State  your  views  regarding  the  two  propositions. 

Question  166 

Is  it  the  duty  of  an  auditor  to  examine  the  transfer 
books  of  a  corporation  ?    Explain. 

Question  167 

How  may  the  auditor  protect  himself  in  a  case  where 
there  are  many  branches  that  he  is  not  permitted  to  visit, 
through  which  some  of  the  business  is  carried  on? 


NEW    YORK  41 

Question  168 

A  firm  carries  on  its  books  a  number  of  parcels  of  real 
estate.  By  what  means  could  the  auditor  satisfy  himself  as 
to  the  ownership  and  value  of  the  several  parcels  ? 

Question  169 

In  making  an  examination  of  the  assets  of  a  company, 
the  officer  charged  with  the  custody  of  securities  owned  is 
unable  to  produce  a  certain  certificate  of  stock  which  should 
be  on  hand  when  called  for.  It  is  produced  later.  Would 
it  be  the  duty  of  the  auditor  in  charge  to  inquire  into  the 
reason  for  its  absence  in  the  first  instance?  Give  reasons 
for  your  answer. 

Question  170 

It  is  customary  with  some  institutions  to  carry  secret 
reserves.    State  your  views  respecting  that  custom. 

Question  171 

What  system  would  you  advise  for  checking  the  ac- 
counts of  collectors  for  a  charitable  organization  ? 

Question  172 

An  insurance  company  invests  in  the  stocks  and  bonds 
of  other  corporations,  and  the  books  show  a  great  many 
purchases  and  sales  of  securities.  How  should  these  trans- 
actions be  verified? 

Question  173 

A  company  authorizes  its  officers  to  borrow  for  its 
account  $100,000  and  give  as  security  $200,000  of  the  first 


42 


C.    P.    A.    AUDITING    QUESTIONS 


mortgage  bonds  of  the  company.     How  should  this  trans- 
action be  treated  in  the  balance  sheet  ? 

Question  17  Jf 

A  bank  enters  against  overdrafts  the  interest  accrued 
thereon.  If  an  account  is  of  questionable  value,  what 
should  be  its  treatment  in  the  Revenue  account  of  the  in- 
terest so  charged  to  it  ? 

Question  175 

What  is  an  audit?  Mention  the  kinds  of  audits  com- 
monly required  and  explain  the  object  of  each. 

Question  176 

How  may  pay-rolls  be  manipulated  to  conceal  fraud? 
What  steps  should  be  taken  in  a  first  audit  to  detect  such 
manipulation  and  to  prevent  its  recurrence? 

Question  177 

At  what  stage  in  an  audit  should  cash  and  negotiable 
securities  be  verified?    Why? 

Question  178 
Give  the  form  of  an  unqualified  certificate  of  audit? 

Question  179 

Is  it  ever  advisable  to  give  a  qualified  certificate  of 
audit?  If  so,  under  what  circumstances?  Write  such  a 
certificate. 

Question  180 
In  making  a  complete  audit,  how  should  the  accountant 


NEW    YORK  43 

satisfy  himself  that  all  disbursements  have  been  actually- 
made  as  charged  in  the  accounts  ? 

Question  181 

Outline  your  method  of  procedure  in  auditing  the  ac- 
counts of  a  wholesale  dry-goods  store. 

Question  182 

The  secretary  of  a  manufacturing  corporation  has  un- 
dertaken to  close  its  books.  The  balance  to  the  credit  of 
the  Profit  and  Loss  account  is  just  sufficient  to  enable  the 
directors  to  declare  a  small  dividend,  which  they  propose  to 
do.  At  this  juncture,  the  services  of  an  accountant  are  en- 
gaged. He  finds  that  no  provision  for  depreciation  has  been 
made,  and  that  all  expenditures  for  repairs  and  renewals, 
amounting  to  more  than  the  proposed  dividend,  have  been 
charged  direct  to  Plant  account.  Show  the  nature  of  any 
corrective  entries  that  should  be  made.  What  would  be  the 
effect  of  such  entries,  there  being  no  surplus  ? 

Question  183 

Mention  five  of  the  technical  errors  that  frequently  oc- 
cur in  the  keeping  of  accounts,  and  give  the  method  of  de- 
tecting them  ? 

Question  18J^ 

In  auditing  the  accounts  of  a  corporation  engaged  in  the 
business  of  erecting  gas  retorts  in  various  sections  of  the 
country,  you  have  reason  to  suspect  that  losses  are  steadily 
sustained  on  account  of  the  theft  of  valuable  tools  by  work- 
men. What  recommendation  would  you  make  for  the  pur- 
pose of  preventing  such  losses? 


44 


C.    P.    A.    AUDITING    QUESTIONS 


Question  185 

A  company  was  organized  in  February,  1900,  for  the 
purposes  of  constructing  and  operating  two  iron  furnaces 
as  one  plant,  and  of  owning  and  mining  ore  properties. 

An  issue  of  mortgage  bonds  was  arranged  for  the  pur- 
pose of  providing  funds  to  finance  the  constructing  of  the 
plant  and  the  purchase  and  development  of  ore  properties. 
The  mortgage  provided  that  the  property  should  be  main- 
tained by  the  company  in  first-class  condition. 

The  first  furnace  was  put  in  blast  in  May,  1901,  and  the 
second  in  June,  1902.  The  ore  property  was  developed  and 
mining  commenced  in  April,  1901,  at  which  date  the  total 
cost  of  the  property  and  development  amounted  to  $50,000. 
The  superintendent  of  the  plant  reports  monthly  the  quan- 
tities of  ores  and  materials  received,  and  also  the  quantities 
used  at  the  furnaces.  Stores  accounts  are  kept  for  each 
kind  of  ore  and  material.  Piles  of  ores  and  materials  are 
cleaned  up  periodically.  The  plant  superintendent  also  re- 
ports the  quantities  of  pig  iron  produced  monthly  and  the 
quantities  of  pig  iron  shipped  monthly. 

January  2,  1905,  you  are  appointed  in  the  interest  of  the 
bondholders  and  shareholders  to  audit  the  accounts  of  the 
company  for  five  years  ending  February  28,  1905. 

Apart  from  the  accuracy  of  the  clerical  work  and  book- 
keeping, what  are  the  principal  points  to  be  ascertained  with 
regard  to  (a)  expenditures,  (b)  issue  of  bonds,  (c)  mainte- 
nance of  the  properties?  State  how  you  would  satisfy 
yourself  of  the  accuracy  of  the  following  assets  and  liabilities 
at  the  close  of  the  period  of  your  examination:  stocks  of 
ores  and  materials,  stock  of  pig  iron,  mortgage  bonds  out- 
standing, capital  stock  outstanding. 

Question  186 
In  drawing  up  a  balance  sheet  is  it  desirable  to  show 


NEW    YORK  45 

the  assets  and  liabilities  by  groups,  and,  if  so,  into  what 
groups  would  you  classify?  Give  reasons  for  your  classi- 
fication. 

Question  187 

You  are  appointed  to  audit  the  accounts  of  the  trustees 
of  the  late  C.  D.  who  were  designated  in  his  will.  His  es- 
tate consisted  of  cash,  real  estate,  U.  S.  government  bonds, 
shares  in  various  enterprises,  mortgages  on  real  estate,  and 
a  partnership  interest  in  a  manufacturing  firm.  What 
documents  and  records  would  you  need  to  see  in  order  to 
satisfy  yourself  that  the  accounts  were  properly  stated  and 
the  interests  of  the  beneficiaries  properly  administered  ? 

Question  188 

Should  inventories  of  a  manufacturing  concern  be  taken 
at  cost  value,  at  market  value,  or  at  some  other  value  ?  Give 
reasons. 

Question  189 

When  sales  are  made  on  time  with  the  proviso  that 
certain  discounts  are  to  be  allowed  if  payment  is  made  on 
or  before  specified  dates,  would  you,  when  auditing  the 
accounts,  make  provision  for  such  discounts  on  outstanding 
accounts?  Give  reasons  and  an  argument  for  or  against 
the  practice. 

Question  190 

A  contractor  engages  to  erect  a  building  for  $250,000, 
and  his  estimates  indicate  a  profit  to  him  of  $25,000  in  the 
transaction.  He  receives  during  the  fiscal  year  payments 
aggregating  $85,000  on  architect's  certificates,  showing  that 


46  C.    P.    A.    AUDITING    QUESTIONS 

$100,000  worth  of  work  has  been  done.  Ought  any  of  the 
contemplated  profits  to  be  carried  into  the  accounts  for  that 
year,  and,  if  so,  how  much? 

Question  191 

In  auditing  the  accounts  of  a  corporation,  what  special 
precautions  would  suggest  an  inspection  of  the  minute 
books,  the  stock  ledger,  the  bond  register,  and  a  review  of 
certain  initial  entries  relating  to  the  company's  formation 
at  a  date  prior  to  that  covered  by  the  immediate  audit  ? 

Question  192 

To  what  extent  may  the  "organization  expenses"  of  a 
corporation  be  regarded  as  a  permanent  asset  and  how 
should  this  account  accordingly  be  dealt  with  ? 

Question  193 

An  employee  holding  the  dual  position  of  cashier  and 
bookkeeper  is  suspected  of  dishonesty.  Some  one  has  estab- 
lished the  agreement  between  his  cash  book  and  bank  pass 
book.  What  should  an  auditor  do  if  subsequently  called  in 
to  ascertain  the  facts  ? 

Question  19  Jf 

In  going  over  the  affairs  of  a  banking  institution  with 
branches,  state  how  the  following  items  should  be  verified : 
(1)  cash  at  home  ofiice  and  branches,  (2)  loans  secured 
and  unsecured,  (3)  securities  owned.  What,  if  anything, 
should  be  done  concerning  individual  depositor's  accounts? 

Question  195 

A  company  is  organized  with  a  capital  of  $50,000.  The 
stock    is   issued    for   a   "going   concern"    whose   accounts 


NEW    YORK  47 

showed  it  to  have  a  net  worth  of  $45,000.  Nothing  was 
said  about  good-will  when  the  contracts  were  made  between 
the  owners  and  the  new  company.  How  would  you  treat  the 
$5,000  difference? 

Question  196 

Is  an  auditor  justified  in  certifying  to  a  balance  sheet  in 
case  the  books  of  account  are  not  in  balance  ?    Give  reasons. 

Question  197 

In  the  books  of  an  insurance  company  are  found  numer- 
ous entries  relating  to  the  purchase  and  sale  of  stocks  and 
bonds.  What  proof  should  the  auditor  require  as  to  the 
correctness  of  these  accounts  ? 

Question  198 

In  auditing  the  accounts  of  a  fiduciary,  chargeable  with 
income  arising  from  rents,  interest,  securities,  and  cash  in 
bank,  how  should  the  auditor  satisfy  himself  that  a  full  re- 
turn was  shown  by  the  books  submitted? 

Question  199 

How  would  you  proceed  to  ascertain  the  net  sales,  pur- 
chases, expenses,  and  net  profits  of  a  business  for  a  given 
period  when  the  ledgers,  sales  books,  purchase  books,  and 
supporting  documents  have  been  destroyed  by  fire,  and  the 
only  records  available  are  the  cash  book,  bank  pass  book, 
and  book  of  monthly  balances,  the  latter  containing  all  the 
ledger  balances  and  annual  balance  sheets?  (It  is  to  be 
understood  that  no  unusual  transactions  had  taken  place.) 

Question  200 

What  do  you  consider  the  best  method  to  employ  in  the 
review  and  audit  of  cash  receipts  and  payments? 


48  C.    P.    A.    AUDITING    QUESTIONS 

Question  201 

What  method  would  you  recommend  in  the  conduct  of 
a  cash  account  to  faciHtate  a  speedy  and  thorough  audit 
thereof  ? 

Question  202 

Is  there  any  reason  why  the  good-will  carried  as  an  asset 
on  the  books  of  a  prosperous  and  growing  manufacturing 
concern  should  be  depreciated,  amortized,  or  otherwise  writ- 
ten off,  and,  if  so,  what  would  be  the  effect  of  such  depre- 
ciation, amortization,  or  writing  off? 

Question  203 

When  a  corporation  acquires  a  number  of  separate 
plants,  paying  a  lump  sum  for  each,  is  it  necessary  for  it  to 
show  on  the  books  the  proportion  of  the  purchase  price  paid 
for  the  good-will,  and,  if  so,  what  would  be  the  proper 
method  of  ascertaining  and  expressing  such  proportion  in 
the  accounts? 

Question  204 

Give  the  steps  that  should  be  taken  to  insure  the  state- 
ment of  the  full  liability  on  the  following  items  appearing  in 
the  balance  sheet :  preferred  cumulative  stock,  first  mortgage 
bonds,  collateral  trust  bonds,  income  bonds,  car  trust  notes. 

Question  205 

A  railway  company  leases  the  property  of  another  rail- 
way company  for  a  period  of  50  years  and,  as  part  of  the 
consideration  for  the  lease,  agrees  to  expend  immediately 
$250,000  on  the  leased  property,  in  order  that  it  shall  have  a 
greater  operating  efficiency.  At  the  termination  of  the  lease 
the  property  is  to  be  returned  to  the  lessor  in  the  same 


NEW    YORK  49 

condition  as  at  the  time  of  making  the  lease,  subject  to 
ordinary  wear  and  tear.  What  entries,  if  any,  would  you 
make  on  the  books  of  the  lessor  in  respect  to  the  expenditure 
of  the  $250,000,  and  why?     Explain  fully. 

Question  206 

A  gas  company  with  a  capital  of  $5,000,000  and  a  sur- 
plus of  $1,000,000  had  made  no  provision  for  the  deprecia- 
tion of  its  property  till  the  directors  reviewed  the  valuation 
of  the  property  accounts  on  the  books  and  decided  to  write 
off  $2,000,000,  thus  creating  an  apparent  deficiency  of 
$1,000,000.  The  net  earnings  during  the  year  following  the 
writing  down  of  the  assets  amounted  to  $1,250,000  before 
any  depreciation  was  charged,  and  the  directors  proposed 
to  pay  out  as  dividend  $1,000,000.  What  opinion  would 
you  express  as  to  this  proposition,  if  called  on  by  the  board 
before  final  action  was  taken? 

Question  207 

The  company  referred  to  in  question  206,  five  years  sub- 
sequent to  the  time  of  writing  down  its  assets  reconsidered 
the  action  taken  at  that  time  and  instructed  its  accounting 
officer  to  write  back  the  valuation  of  the  assets  and  thus 
apparently  add  $2,000,000  to  its  surplus.  If  you  were 
auditing  the  accounts  of  a  corporation  which  owned  prac- 
tically all  of  the  capital  stock  of  the  gas  company,  how 
would  you  regard  both  the  writing  down  and  the  writing 
up  of  the  assets  of  the  subsidiary  company  on  the  accounts 
of  the  company  you  were  auditing? 

Question  208 

A  company  is  organized  for  the  purpose  of  acquiring 
the  capital  stock  of  six  different  corporations,  all  of  which 


50 


C.    p.    A.    AUDITING    QUESTIONS 


manufacture  similar  goods.  The  terms  of  the  contracts 
with  the  various  vendors  of  the  stock  contain  provisions 
that  the  accounts  receivable  as  they  appear  on  the  books  at 
the  date  of  the  contracts  will  be  guaranteed  by  the  vendor. 

On  a  subsequent  examination  of  the  accounts  of  the 
several  companies,  you  ascertain  that  many  of  the  accounts 
receivable  had  been  paid,  not  by  the  original  debtors,  but 
by  the  guarantors.  State  what  criticism  or  recommenda- 
tions you  would  make  under  the  circumstances  and  give 
your  reasons  therefor. 

Question  209 

If,  under  the  conditions  mentioned  in  question  208,  you 
were  called  on  to  certify  to  the  amount  of  profits  of  the  six 
companies  for  the  year  prior  to  the  date  at  which  the  ac- 
counts receivable  were  guaranteed,  would  the  fact  that  cer- 
tain of  the  accounts  had  been  paid  by  the  guarantors  affect 
the  profits  earned?     Give  fully  your  reasons. 

Question  210 

In  examining  the  accounts  of  a  coal  company,  you  find 
that  it  is  the  owner  of  the  entire  capital  stock  of  another 
coal  company;  w^hat  would  you  require  m  respect  to  the 
accounts  of  the  subsidiary  company  before  certifying  the 
balance  sheet  and  income  account  of  the  parent  company? 
State  fully  the  reasons  to  substantiate  your  position  in  the 
matter. 

Question  211 

On  closing  the  books  of  a  large  business  for  the  year, 
it  is  found  that  the  profits  are  much  less  than  were  expected 
and  much  less  than  usual.  What  steps  would  you  take  to 
find  the  reason  for  this  ? 


NEW    YORK  51 

Question  212 
What  is  your  understanding  of  a  cash  audit? 

Question  21 S 

What  measures  do  you  adopt  to  protect  yourself  against 
imposition  by  persons  who  have  access  to  the  books  while 
you  are  auditing  them  ? 

Question  21  h 

A  company  owns  all  of  the  capital  stock  of  another  com- 
pany. This  company  has  outstanding  an  issue  of  bonds  not 
guaranteed  by  the  company  holding  the  stock.  The  assets 
of  this  subsidiary  company  are  deemed  insufficient  to  cover 
the  bonds,  so  that  its  capital  stock  has  no  value.  The  own- 
ing company  desires  the  auditor  to  prepare  its  balance  sheet, 
setting  up  the  assets  of  this  subsidiary  company  along  with 
other  assets  directly  owned,  and  the  bonds  as  liabilities.  Is 
it  proper  for  him  to  do  so  under  the  circumstances?  Give 
reasons  for  your  answer. 

Question  215 

What  do  you  consider  a  complete  checking  of  (a)  the 
general  journal,  (b)  the  purchase  journal? 

Question  216 
What  is  your  method  of  checking  dividends  paid? 

Question  217 

A  New  York  company  sells  its  capital  stock  at  a  pre- 
mium and  the  directors  pass  a  resolution  to  declare  a  divi- 
dend out  of  the  surplus  thus  paid  in.  Would  you  call  atten- 
tion to  this  action  if  asked  to  make  up  the  accounts,  and,  if 
so,  why? 


52 


C.    p.    A.    AUDITING    QUESTIONS 


Question  218 

In  examining  the  books  of  a  corporation  you  find  that 
an  officer  is  a  partner  in  a  business  from  which  the  corpora- 
tion makes  purchases.  Upon  scrutiny  you  find  that  all  the 
transactions  are  at  proper  figures.  Would  you,  under  such 
conditions,  call  attention  to  the  fact  when  making  your  re- 
port to  the  directors  ? 

Question  219 

A  concern  owns  a  parcel  of  real  estate  which  cost  it 
$500,000.  There  is  a  purchase  money  mortgage  on  it  of 
$350,000.  You  are  asked  to  enter  the  same  in  the  balance 
sheet  at  $150,000  net.  Would  you  comply  with  this  request  ? 
Give  reasons  for  your  answer. 

Question  220 

Under  a  law  permitting  payment  of  dividends  solely  out 
of  surplus  earned,  a  corporation  pays  a  dividend  out  of  gen- 
eral surplus,  after  carrying  its  losses  for  the  period  against 
the  account.  Would  you  make  mention  of  the  fact  in  the 
recital  accompanying  your  statements,  or  would  you  let  it 
go  without  specific  mention  ?    Give  reasons. 

Question  221 

A  teller  is  found  to  be  short  in  cash.  He  has  been  in 
the  position  for  a  period  of  three  years  and  has  a  daily 
record  of  cash  on  hand.  His  bond  of  suretyship  antedates 
the  discovery  of  the  shortage  by  a  period  of  six  months,  and 
it  contains  a  clause  that  the  surety  shall  not  be  liable  for  a 
shortage  existing  at  the  date  the  bond  became  effective.  You 
are  employed  by  the  surety  to  ascertain  if  the  shortage  falls 
within  the  period  of  the  bond.  What  steps  would  you  take  ? 
Do  you  think  that  you  would  be  successful  ? 


NEW    YORK  53 

Question  222 
What  is  the  objection  to  loose-leaf  depositors'  ledgers? 

Question  223 

In  auditing  the  paid  bank  checks  of  a  corporation  using 
a  specially  printed  form  of  check,  numbered  numerically, 
would  you  consider  it  necessary  to  account  for  all  check 
forms  received  from  the  printer?  Give  your  reasons  for 
or  against  such  accounting. 

Question  221^ 

In  making  an  audit  would  you  consider  it  necessary  to 
check  in  detail  the  postings  of  subsidiary  ledgers  ?  Explain 
fully. 

Question  225 

In  examining  the  books  of  a  railroad  company  for  the 
purpose  of  determining  the  profits  for  a  given  period  only, 
what  class  of  expenditures  should  be  carefully  examined*? 
State  how  you  would  verify  such  expenditures. 

Question  226 

In  auditing  the  books  of  a  concern  that  does  busi- 
ness in  a  small  city  outside  of  New  York  and  that  uses  a 
combined  check  and  voucher  for  making  payments,  it  is 
found  that  the  concern  buys  drafts  on  New  York  and  remits 
these  drafts  to  its  creditors.  If  the  voucher  check  reads, 
"For  the  purchase  of  New  York  drafts  to  the  order  of  the 
creditor  to  whom  the  money  is  due,"  would  you  consider 
this  a  sufficient  voucher  for  the  payment  of  invoices  of  the 
specified  purchases  ?  State  fully  your  reasons  for  or  against 
accepting  these  vouchers  as  sufficient  evidence  of  such  pay- 
ments. 


54  C.    P.    A.    AUDITING    QUESTIONS 

Question  227 

Explain  fully  how  you  would  proceed  in  inspecting  and 
verifying  the  bonds  and  stocks  (not  valuation)  owned  by  a 
company  whose  books  you  are  auditing,  stating  the  princi- 
pal points  you  would  investigate  in  connection  with  the 
coupons  and  the  names  appearing  on  the  stock  certificates. 

Question  228 

In  auditing  an  account  the  auditor  finds  that  Robert 
Brown  had  bought  a  bill  of  goods  amounting  to  $500,  pay- 
able on  August  10th,  less  2%.  He  had,  however,  made  pay- 
ments thereon  as  follows :  June  2nd,  $100 ;  June  15th,  $100; 
July  3rd,  $100;  On  what  date  would  he  be  required  to  make 
payment  of  the  remaining  $200  to  entitle  him  to  the  2% 
discount  under  the  original  terms  of  sale  ? 

Question  229 

How  should  journal  entries  be  verified  ?  What  particu- 
lar class  or  kind  of  journal  entries  should  be  subjected  to 
careful  scrutiny  on  the  part  of  the  auditor?  Why?  Ex- 
plain in  a  general  way  how  the  journal  may  be  used  as  a 
medium  for  the  falsification  of  the  following  accounts:  (a) 
cash,  (b)  accounts  receivable,  (c)  asset  accounts  or  expense 
accounts.  Explain  the  purpose  and  effect  of  such  false 
entries. 

Question  230 

Write  two  forms  of  certificate  such  as  might  be  given  to 
a  client  upon  your  completing  an  audit  for  the  fiscal  year  of 
the  company. 

Question  231 

The  accounts  of  a  steel  and  iron  manufacturing  com- 
pany show  large  additions  to  plant  and  machinery.     It  is 


NEW   YORK  55 

found  that  these  charges  include  considerable  amounts  from 
pay-rolls.  In  the  absence  of  specific  explanations  as  to  the 
pay-roll  element,  what  method  should  be  employed  by  the 
auditor  to  determine  the  accuracy  and  the  propriety  of  these 
charges  ? 

Question  232 

A  public  service  corporation  that  regularly  sets  aside 
from  its  profits  a  sufficient  amount  to  provide  for  deprecia- 
tion, removes  part  of  its  old  plant  and  replaces  it  with  a 
larger  and  more  costly  one.  The  old  plant  is  sold  for  scrap. 
How  should  the  cost  of  the  new  plant  and  the  proceeds  from 
the  sale  of  the  old  plant  be  treated  in  the  accounts  of  the 
company?    Give  reasons. 

Question  283 

How  should  an  auditor  determine  that  allowances  for 
errors  in  bills  and  credits  for  merchandise  returned  are 
proper  credits  to  customers'  accounts,  and  are  not  made  to 
cover  amounts  misappropriated  by  the  bookkeeper  and 
cashier  ? 

Question  23Jf 

In  handling  large  factory  pay-rolls,  which  do  you  con- 
sider the  better  practice  for  the  prevention  of  fraud,  the 
taking  of  receipts  from  each  employee  for  the  amounts  paid, 
or  the  establishment  of  a  good  system  of  accounting  for 
handling  pay-rolls  ?  Give  reasons  and  explain  why  you 
think  one  method  is  better  than  the  other. 

Question  235 

If  the  cash  in  bank  as  shown  by  the  cash  book  or  ledger 
is  reconciled  with  the  amount  shown  by  the  pass  book  or 
certificate  obtained  from  the  bank,  is  it  necessary  to  check 


56  C.    P.    A.    AUDITING    QUESTIONS 

the  pass  book  with  the  deposits  as  shown  by  the  cash  book? 
Give  reasons  for  your  answer,  stating  the  nature  of  a  pos- 
sible irregularity  that  might  be  disclosed  by  such  detail 
checking. 

Question  236 

The  bookkeeper  and  cashier  of  a  concern  whose  cus- 
tomers make  all  their  remittances  by  check,  fails  to  record 
certain  bills  on  the  sales  books  and  misappropriates  the 
amounts.  The  remittance  checks  for  these  bills  were  regu- 
larly deposited  in  the  bank  and  the  checks  drawn  for  petty 
cash  include  additional  amounts  for  such  checks.  State  and 
explain  two  parts  of  an  audit  that  might  lead  to  the  detec- 
tion of  the  misappropriation. 

Question  237 

What  measures  should  be  taken  to  ascertain  whether  or 
not  any  notes  receivable  have  been  discounted  and  cleared 
from  the  books,  notwithstanding  the  fact  that  they  are  not 
due  and  at  maturity  will  be  subject  to  demand  on  the  last 
indorser  in  case  payment  is  defaulted  by  the  maker  ? 

Question  238 

What  examinations  should  an  auditor  make  with  re- 
spect to  fire  insurance  policies  and  their  cost  ?  What  should 
he  do  if  he  finds  that  all  premiums  have  been  charged  to  ex- 
penses when,  and  as  vouched  or  otherwise,  entered  to  the 
credit  of  the  insurance  company  or  broker?  What  notice, 
if  any,  should  an  auditor  take  of  the  fact  that  the  client  has. 
at  risk  of  loss  by  fire  property  on  which  no  insurance  is 
carried  ? 

Question  239 
Describe  two  methods  of  procedure  by  either  of  which 


NEW   YORK  57 

might  be  detected  the  fact  that  a  cashier  has  been  appro- 
priating to  his  own  use  the  funds  of  his  employer,  but  has 
been  keeping  his  cash  book  in  agreement  with  the  funds  on 
deposit  and  in  hand  through  the  process  frequently  termed 
^'kiting  remittances  of  customers,"  i.  e.,  depositing  on  one 
day  all  checks  and  drafts  received  from  customers  on  that 
day  together  with  a  sufficient  amount  of  cash  to  equal  the 
cash  book  entries  made  on  the  same  day  for  amounts  re- 
ceived from  certain  customers  on  previous  days,  thereby 
postponing  the  entry  of  receipts  from  customers  to  an 
amount  equal  to  the  cash  misappropriated. 

Question  240 

What  do  the  orders  issued  by  the  Interstate  Commerce 
Commission  require  of  railway  companies  with  respect  to 
making  provision  in  the  accounts  for  the  replacement  of 
equipment  ? 

Question  2Jfl 

What  are  the  duties  of  an  auditor  as  to  examination  of 
inventories  of  finished  product,  product  in  process,  and  ma- 
terials and  supplies,  which  have  been  taken  and  appraised 
by  representatives  of  the  client,  in  case  he  is  not  permitted 
to  make  tests  for  the  purpose  of  satisfying  himself  as  to 
the  integrity  of  the  quantities  shown  ?  How  should  he  cover 
such  a  situation  in  his  report? 

Question  21^2 

What  are  the  duties  of  an  auditor  when  he  finds  no 
charges  made  against  maintenances  or  other  accounts  for 
depreciation  of  plant?  Should  he  be  concerned  with  the 
condition  in  this  respect  which  obtains  throughout  the  pe- 
riod prior  to  the  one  to  be  covered  by  his  audit?     How 


58 


C    p.    A.    AUDITING    QUESTIONS 


should  he  report  to  his  cHent,  having  regard  for  the  possi- 
biHty  of  his  report  being  used  for  the  purpose  of  obtaining 
loans,  obtaining  additional  capital  in  the  business,  or  selling 
some  part  of  the  existing  capital  interests  ? 

Question  2.ltS 

What  means  should  an  auditor  use  to  verify  accounts 
representing  bonds  and  stocks  owned  and  bills  and  notes 
receivable,  and  to  ascertain  whether  or  not  the  book  values 
are  within  the  real  worth  ? 

Question  2JfJf 

State  two  methods  by  which,  under  different  conditions, 
an  auditor  may  establish  the  actual  amount  of  capital  stock 
outstanding,  and  state  the  conditions  that  will  require  the 
use  of  one  method,  and  the  conditions  that  will  require  the 
use  of  the  other  method. 

Question  2^5 

Describe  the  procedure  that  should  be  followed  in  audit- 
ing the  books  and  accounts  of  a  stock  exchange  broker. 

Question  2^6 

Is  an  ordinary  bank  check  drawn  by  the  concern  whose 
books  you  are  auditing,  to  the  order  of  the  Receiver  of 
Taxes  and  properly  indorsed  by  him,  a  sufficient  voucher 
for  the  payment  of  the  taxes  of  this  concern  ?    Give  reasons. 

Question  2Jf7 

Two  concerns  in  similar  lines  contemplate  consolidating 
their  business;  you  are  requested  to  examine  the  books  of 
account  and  report  on  matters  germane  to  the  contemplated 


NEW   YORK  59 

merger.     What  data  would  yon  probably  present  in  your 
report^ 

Question  21^8 

The  assets  of  a  concern  as  shown  by  the  books  include 
real  estate  and  accrued  interest.  In  your  audit  how  would 
you  verify  the  correctness  of  these  items? 

Question  2^9 

In  making  a  bank  examination  woum  you  commence  at 
the  start  of  the  business  day  or  at  the  conclusion  of  the  busi- 
ness day?    Give  reasons. 

Question  250 

How  should  an  auditor  commence  a  new  audit  of  the 
books  of  a  concern  whose  business  is  foreign  to  his  expe- 
rience, in  order  to  gain  familiarity  with  the  work  in  hand 
in  the  shortest  possible  time  ? 

Question  251 

In  classifying  the  items  of  a  statement  of  profit  and  loss 
under  what  caption  should  the  following  items  appear,  to 
be  logically  allocated :  freight  on  sales,  insurance,  salaries 
of  watchmen  ?    Give  reasons  for  your  allocation. 

Question  252 

Describe  the  necessary  precautions  to  be  taken  to  safe- 
guard a  corporation  when  an  executor  presents  a  certificate 
of  stock  for  transfer.    Outline  entries  on  the  transfer  books. 

Question  25S 
Should  any  fluctuation  in  the  valuation  of  permanent 


6o  C.    P.    A.    AUDITING    QUESTIONS 

assets  be  permitted  to  affect  the  result  of  the  Profit  and  Loss 
account?     Give  reasons. 

Question  25J/. 

Draft  instructions  for  cHent  to  follow  in  monthly  recon- 
ciliation of  cash,  as  basis  for  your  audit. 

Question  255 

Is  it  necessary  to  verify  the  stock  ledger  of  a  corpora- 
tion?   Why? 

Question  256 

State  the  method  and  the  objects  of  an  analysis  of  Bills 
Payable  account. 

Question  257 

State,  in  the  order  of  their  importance,  five  rules  for  the 
guidance  of  a  junior  in  starting  on  his  first  audit. 

Question  258 

Outline  working  papers  and  office  records  necessary  to 
handle  detailed  semiannual  audit  of  a  wholesale  mercan- 
tile house. 

Question  259 

State  precautions  that  you  would  take  in  verification  re- 
quiring several  days'  work,  of  the  securities  of  an  insurance 
company,  including  both  stocks  and  bonds  in  negotiable  and 
non-negotiable  form. 

Question  260 

A  corporation  has  branches  in  20  cities,  each  selling  at 
retail    its   standard  product   and   paying   local   bills    from 


NEW   YORK  6l 

receipts.  State  matters  on  which  the  traveHng  auditor  of 
the  corporation  should  report,  and  suggest  suitable  forms 
therefor. 

Question  261 

In  case  it  is  expedient  to  have  a  local  accountant  audit 
the  accounts  of  a  branch  office  of  a  wholesale  trading  firm 
for  which  you  conduct  the  general  audit,  state  matters  on 
which  you  would  require  a  report.  The  branch  sells  goods, 
collects  from  customers,  pays  all  local  expenses,  and  remits 
cash  in  round  amounts  to  home  office. 

Question  262 

A  balance  sheet  audit  discloses  satisfactory  conditions 
with  the  exception  of  insufficient  allowance  for  losses  in 
collection  of  accounts  receivable.  In  case  the  client  should 
not  consent  to  adjustment,  draft  form  of  certificate  that 
would  be  proper  under  the  circumstances. 

Question  263 

State  the  arrangement  of  a  report  in  which  it  is  desired 
to  present  balance  sheet  with  supporting  schedules  of  ac- 
counts receivable,  accounts  payable,  bills  receivable,  and 
bills  payable,  and  profit  and  loss  account,  together  with 
comment  on  extraordinary  features  of  the  business. 

Question  26Jf- 

If  called  on  to  verify  the  Merchandise  account  of  a  man- 
ufacturing concern,  what  steps  would  you  take  to  make  the 
necessary  investigation  ? 

Question  265 

As  an  auditor,  state  and  explain  the  use  of  percentage 
in  the  presentation  of  operating  and  income  results. 


62  C.    p.    A.    AUDITING    QUESTIONS 

Question  266 

You  are  employed  by  a  lawyer  to  examine  and  report 
on  the  affairs  of  several  corporations  similarly  engaged,  with 
a  view  to  the  purchase  of  the  same  by  his  clients.  In  so 
doing  you  find  that  in  paying  a  dividend  the  directors  of  one 
of  the  corporations  have  used  the  premium  received  from 
the  sale  of  its  treasury  stock.  Would  you  deem  it  necessary 
to  call  your  client's  attention  to  this  action,  and,  if  so,  why? 

Question  261 

Give  sample  of  a  report  such  as  you  would  make  after 
having  examined  several  copartnerships  engaged  in  the 
same  line  of  business,  that  desire  to  combine  in  one  corpora- 
tion. Give  your  views,  and  reasons  therefor,  as  to  the  ad- 
visability or  as  to  the  inadvisability  of  the  merger. 

Question  268 

What  condition  of  office  organization,  above  all  others, 
leads  to  fraud  and  defalcation  by  bookkeepers  and  cashiers  ? 
Support  your  opinion. 

Question  269 

What  means  would  you  employ  to  verify  the  usual  cash 
receipts  of  the  average  social  club  ? 

Question  270 
Give  at  length  your  views  on  the  "ethics"  of  accountancy. 

Question  271 

Assuming  that  you  are  a  certified  public  accountant  and 
employed  as  auditor  by  a  corporation,  state  what  you  would 


NEW   YORK  63 

consider  it  your  duty  to  do  in  order  to  safeguard  your  clients 
regarding  the  fire  insurance  that  they  carry  on  their  stock 
of  merchandise. 

Question  272 

A  foreign  agent  of  a  life  insurance  company  sends 
monthly  the  following  data :  a  report  showing  his  receipts 
and  disbursements,  with  dates;  vouchers  supporting  the  dis- 
bursements ;  list  of  overdue  premiums ;  a  statement  of  his 
daily  cash  balances  in  bank,  supported  by  a  certificate  from 
his  bank  as  to  his  closing  balances.  How  would  you  audit 
his  report? 

Question  273 

A  company  has  acquired,  at  $90  per  share,  100  shares  of 
its  own  capital  stock,  of  the  par  value  of  $100  per  share. 
Its  balance  sheet  shows  treasury  stock  $9,000.  Is  this  cor- 
rect? If  so,  why?  If  not,  state  how  you  would  adjust  the 
books. 

Question  27 Jf. 

In  auditing  the  books  of  a  corporation  capitalized  at 
$250,000  you  find  that  three  years  previously  they  acquired 
the  business  of  a  copartnership  included  in  which  was  an 
asset  called  good- will  valued  at  that  time  at  $25,000,  since 
which  the  same  has  not  been  written  down.  The  average 
profits  of  the  corporation  for  three  years  have  been  9%  on 
the  capitalization.  How  would  you  treat  the  item  good- 
will?   Give  reasons. 

Question  275 

What  steps  would  you  take  to  audit  the  notes  receivable 
purchased  and  the  notes  receivable  on  commission  held  by 


64  C.    P.    A.    AUDITING    QUESTIONS 

a  cottimercial  paper  house,  to  satisfy  yourself  that  there  had 
been  no  fraud  by  substitution? 

Question  276 

The  cashier  of  a  concern  is  at  the  same  time  its  book- 
keeper. During  his  absence  on  vacation  sHght  irregularities 
are  discovered  and  you  are  engaged  to  audit  his  books.  He 
returns  on  the  day  you  begin  your  audit  and  admits  a  defal- 
cation of  $5,000.  Knowing  that  his  receipts  were  supposed 
to  be  deposited  daily  in  the  bank,  state  the  steps  that  you 
would  take  to  ascertain  the  truth  of  his  admission. 

Question  211 

The  result  of  your  count  of  the  "cash  on  hand"  at  a 
large  agency  on  January  1,  1912,  discloses : 

Bills  $1,979.00 

Coin   484.19 

Cash  items  supported  by  properly  signed  vouchers: 

January        14,  1908— Sub-agent  Jones $200.00 

July  20,  1909— Sub-agent  Thomas....  140.00 
August  20,  1909— Sub-agent  Vincent..  ..  75.00 
September  30,  1910— Sub-agent    Nelson 230.00         645.00 

Cash  balance  as  per  general  ledger $3,108.19 

Does  this  count  complete  your  duty  as  an  auditor?  If 
you  consider  that  further  steps  are  necessary  state  what 
you  would  do. 

Question  218 

What  instructions  would  you  give  to  a  junior  account- 
ant to  whom  you  had  intrusted  the  audit  of  the  account  In- 
vestment in  Bonds  and  Mortgages  appearing  on  the  books 
of  a  trust  company  ? 


NEW   YORK  65 

Question  219 

You  find  that  a  concern  whose  books  you  are  auditing 
has  capitalized  the  amount  of  royalties  that  it  would  have 
had  to  pay  on  the  sales  of  a  three  years'  period  if  it  had  not 
owned  the  patents.  On  the  increase  of  surplus  thus  obtained 
the  directors  have  declared  a  stock  dividend.  Would  you 
consider  yourself  called  on  to  criticize  the  action  of  the  di- 
rectors? If  so,  state  what  would  be  the  character  of  your 
criticism  ? 

Question  280 

The  bondholders  of  a  company  are  contemplating  an  ac- 
tion against  the  directors  and  retain  you  to  obtain  the  ac- 
counting proof  of  their  contentions ;  subsequently  the  direc- 
tors ask  you  to  act  in  the  same  capacity  for  them ;  they  pro- 
fess to  have  no  objections  to  your  representing  both  sides. 
What  would  you  do? 

Question  281 

Explain  the  steps  you  would  take  regarding  an  asset  de- 
scribed as  "Accounts  Receivable — Suspense,"  in  the  audit  of 
a  business,  the  owners  of  which  required  a  "clean  and  un- 
qualified certificate." 

Question  282 

In  an  audit  of  a  business  the  Plant  account  of  which  has 
been  increased  from  $100,000  to  $150,000,  what  steps  would 
you  take  regarding  this  asset  and  what  would  be  your  con- 
trolling consideration  as  to  the  propriety  of  the  $50,000  of 
additions  during  the  period  under  audit? 

Question  283 
What  vouchers  would  you  refuse  to  accept  in  the  audit 


66  C.    P.    A.    AUDITING    QUESTIONS 

of  a  corporation,  even  though  such  vouchers  were  duly 
approved  by  such  of  the  officers  of  the  corporation  as  is  re- 
quired by  custom  or  in  the  by-laws?  Give  examples  and 
explain. 

Question  £8J^ 

A  life  insurance  company  pays  a  lump  sum  of  $7,500  to 
purchase  an  agent's  interest  in  renewal  premiums.  What 
is  the  correct  treatment  of  such  expenditure  ?    Explain  fully. 

Question  285 

A  lead  company  issues  certificates  evidencing  the  sale  of 
and  agreement  to  deliver  on  demand  to  the  purchaser  a  cer- 
tain number  of  pigs  of  lead  of  variable  and  unknown  weight, 
at  a  price  to  be  based  on  the  average  daily  published  quo- 
tation of  pig  lead  during  the  month  in  which  the  certificates 
are  issued.  In  a  certified  balance  sheet  how  would  you 
treat  these  certificates  ?    Explain. 

Question  286 

In  an  audit  covering  the  year  ended  December  31,  you 
discover  that  invoices  aggregating  $2,000  for  bricks  and 
other  building  materials  to  be  used  in  the  construction  of  an 
addition  to  the  plant,  were  received  after  the  books  were 
closed,  although  the  materials  were  actually  received  on  De- 
cember 15.  As  the  materials  were  not  taken  into  the  inven- 
tory and  the  invoices  were  not  on  the  books,  would  you  re- 
quire any  adjustment?    Give  reasons. 

Question  287 

As  a  certified  public  accountant  auditing  the  books  of  a 
manufacturing  business  that  operated  a  supposedly  highly 
developed  cost  system,  what  steps  would  you  take  regarding 


NEW   YORK  67 

inventory  values  that  were  found  to  agree  with  the  cost 
records  ? 

Question  288 

You  are  instructed  to  make  an  audit,  prepare  and  certify 
a  balance  sheet  to  be  publicly  used  in  the  sale  of  additional 
capital  stock.  The  date  of  your  engagement  is  September 
16,  1912.  No  inventory  has  been  taken  since  October  31, 
1911.     What  course  would  you  pursue? 

Question  289 

The  Wiltshire  Life  Insurance  Company's  office  build- 
ing has  suffered  a  total  loss  by  fire.  The  loss  stands  on  the 
books  at  $100,000,  but  the  site  alone  is  known  to  be  worth 
double  that  amount.  At  the  time  of  your  audit  the  company 
has  lost  in  rentals  from  the  burned  building  $6,000  and  has 
paid  $15,000  taxes  and  expenses  incidental  to  the  removal 
of  debris.  How  would  you  have  these  items  treated  ?  Give 
reasons. 

Question  290 

Write  three  concise  certificates  to  a  balance  sheet,  with 
qualifications  respectively  as  to  (a)  inventory  of  merchan- 
dise not  taken  under  your  supervision,  (b)  accounts  re- 
ceivable not  verified  by  confirmation,  (c)  investment  securi- 
ties not  examined. 

Question  291 

The  "proof"  of  the  first  teller  of  a  bank  shows  the  fol- 

I owing  captions : 
Debits:   (1)   Cash,    (2)    Second   Teller,    (3)    Third 
Teller,    (4)    Second   Teller   Special,    (5) 
I  Clearing  House. 


68  C.    P.    A.    AUDITING    QUESTIONS 

Credits:  (1)  National  Bank  Notes,  (2)  Checks  on 
Bank,  (3)  Second  Teller's  Items,  (4) 
Third  Teller's  Items,  (5)  Clearing  House. 

State  what  instructions  you  would  give  to  an  assistant 
whom  you  were  about  to  intrust  with  the  checking  of  that 
proof,  immediately  following  the  count  of  the  cash  and  se- 
curities on  hand. 

Question  292 

You  were  retained  by  an  inventor  to  ascertain  the  accu- 
racy of  the  figures  submitted  by  a  company  operating  under 
his  license.  Royalties  are  paid  on  sales ;  licensee  issues  a  cata- 
logue in  which  the  sundry  finished  products  are  referred  to 
by  numbers ;  if  the  invention  is  used  on  any  particular  pro- 
duct the  letter  ^'I"  precedes  the  code  number.  What  steps 
would  you  take  to  perform  your  duty  ? 

Question  293 

An  electric  lamp  manufacturing  company  has  charged 
to  cost  of  lamps  as  "depreciation,"  one-fourth  of  the  value 
of  the  filament-filtering  machinery  acquired  a  little  more 
than  one  year  ago.  The  life  of  the  machinery  is  estimated 
to  be  10  years,  but,  owing  to  discovery  by  a  competitor  of  a 
new  process  of  metal  pulling  which,  while  still  imperfect, 
promises  to  revolutionize  the  lamp  industry,  the  machinery 
in  question  will  probably  be  obsolete  within  a  period  of  three 
years.  State  at  length  what  you  would  say  concerning  the 
propriety  of  making  such  a  charge  to  cost. 

Question  29Jf 

The  consolidation  of  companies  A,  B,  and  C  is  under 
consideration;    it    is    desired    to    establish    a    comparative 


NEW    YORK  69 

Statement  of  income  for  the  three  companies  as  of  August 
31,  1912.  Company  A  closes  its  books  on  December  31 ; 
Company  B  on  June  30;  the  fiscal  period  of  Company  C 
expires  on  August  31.  No  inventories  have  been  taken  as 
of  the  latter  date  by  A  and  B,  and  they  will  not  be  taken. 
Express  the  procedure  that  you  would  follow  in  order  to 
establish  a  satisfactory  statement. 

Question  295 

A,  engaged  in  the  jobbing  business,  enters  into  a  copart- 
nership agreement  wnth  B,  the  terms  of  which  are  in  sub- 
stance as  follows  :  B  is  to  share  in  the  gains  and  losses  of  the 
business  at  the  ratio  of  37%%,  which  is  in  proportion  to  his 
investment  of  $6,000.  A  is  to  act  as  general  manager, 
cashier,  etc.,  and  is  to  render  an  accounting  to  B  at  the  end 
of  every  six  months.  The  books  are  kept  by  single  entry. 
There  are  day  book,  check  book  provided  with  proper  col- 
umns and  space  for  deposits,  drawing,  and  particulars,  and 
a  general  ledger  kept  in  accordance  with  the  purpose  of 
single  entry.  All  moneys  received  or  paid  pass  through  the 
bank.  You  are  engaged  to  render  the  accounting  to  B  at 
the  end  of  the  first  six  months.  State  what  information 
you  would  consider  necessary  to  convey  to  B  and  how  you 
would  proceed  to  obtain  it  from  the  material  at  hand. 

Question  296 

What  are  the  chief  points  to  which  attention  should  be 
directed  in  dealing  with  fluctuating  currency  in  the  books  of 
accounts  of  merchants? 

Question  297 

An  auditor,  on  completing  an  investigation  of  the  af- 
fairs of  an  importing  house,  certifies  that  the  accounts  are 


70 


C.    p.    A.    AUDITING    QUESTIONS 


correct  as  recorded  in  the  books.     Would  you  criticize  this 
certification?    If  so,  why? 

Question  298 

An  importer  of  automobiles  receives  shipments  in  ac- 
cordance with  bona  fide  orders  placed  against  six  months' 
acceptances  with  interest.  He  stores  the  merchandise  in 
bonded  warehouses  subject  to  withdrawal.  At  the  end  of 
the  fiscal  period  it  is  customary  to  omit  from  the  inventory 
such  warehouse  goods  as  are  left  and  also  the  acceptances 
unpaid.  In  being  asked  to  certify  the  statement  of  condi- 
tions at  a  given  time,  how  would  you  deal  with  this  state  of 
facts  ? 

Question  299 

A,  B,  and  C  are  equal  partners,  each  having  subscribed 
$5,000  to  the  partnership.  A  pays  in  $3,000,  leaving  $2,000 
still  due  the  partnership  on  his  capital  account.  It  is  agreed 
for  the  present  that  this  $2,000  can  remain  unpaid,  provided 
A  pays  interest  on  same,  which  he  does.  Later  a  dispute 
arises  as  to  how  this  interest  shall  be  credited.  A  claims 
that  it  should  be  included  with  the  earnings  of  the  business, 
the  profits  of  which  are  to  be  divided  equally  among  the 
three  partners.  B  and  C  claim  that  this  interest  should  be 
divided  between  them  only,  as  they  have  fully  lived  up  to 
their  obligations  under  the  partnership  agreement,  while  A 
had  only  partially  done  so.  To  what  account  should  the 
interest  on  the  deferred  payment  be  credited? 

Question  300 

In  auditing  the  accounts  of  a  manufacturing  firm,  what 
salient  features  of  the  cost  ledger  should  receive  attention  ? 


NEW   YORK 


Question  301 


71 


In  auditing  the  accounts  of  a  manufacturing  contractor, 
what  manipulations  of  the  cost  accounts  should  the  auditor 
anticipate,  to  guard  against  inflating  profits? 

Question  302 

What  common  expedient  is  resorted  to  by  manufacturing 
contractors  to  hide  their  losses  in  the  cost  ledger  ? 

Question  303 

In  auditing  the  accounts  of  a  factor,  what  equitable 
method  should  the  auditor  employ  to  ascertain  the  amount 
of  interest  due  to  or  from  the  consignor  with  respect  to  the 
account  sales  ? 

Question  30Jf 

What  documentary  evidence  would  you  require  to  prove 
the  acceptance  of  bills  payable  by  a  factor,  against  goods  in 
transit  ? 

Question  305 

The  value  of  the  lease  of  a  piece  of  property  for  20  years, 
with  privilege  of  renewal  for  a  like  period,  is  carried  on 
the  books  at  its  value  in  fee  simple.  Would  you  pass  this 
unnoticed  ?    If  not,  why  not  ? 

Question  806 

In  the  books  of  a  manufacturing  corporation  whose  ac- 
counts you  are  investigating  for  creditors,  you  learn  from 
outside  sources  that  accounts  assigned  to  a  discount  com- 
pany have  been  concealed.  Explain  how  this  may  have  been 
done  and  the  methods  you  would  pursue  to  detect  it. 


72  C.    p.    A.    AUDITING    QUESTIONS 

Question  307 

Three  corporations  are  to  be  merged.  In  examining  the 
records  of  corporation  B,  formed  three  years  previously  with 
an  authorized  capital  of  $250,000,  you  find  the  entire  capital 
stock  carried  on  the  books  as  fully  paid  in.  The  facts  you 
ascertain  are  as  follows : 

There  are  three  directors,  X,  Y,  and  Z,  composing  all  the 
subscribers  to  the  stock.  The  payments  have  been  received 
at  a  directors'  meeting  with  all  present.  X  subscribed  for 
$100,000  worth  of  stock  and  paid  all  in  cash ;  Y  subscribed 
for  $75,000  worth  of  stock  and  paid  $50,000  in  cash  and  a 
note  of  $25,000  on  demand ;  Z  subscribed  for  $75,000  worth 
of  stock  and  paid  $25,000  in  cash  and  a  note  of  $50,000  on 
demand. 

These  notes  are  carried  among  the  assets  and  are  still 
unpaid  at  the  time  of  your  examination,  no  interest  having 
been  collected.  Y  and  Z  cannot  make  good.  In  preparing 
a  report  on  this  state  of  facts  what  recommendations  would 
you  make,  and  why? 

Question  308 

In  auditing  the  books  of  a  concern  you  detect  the  fol- 
lowing : 

A  customer  paid  $100  in  currency  on  account  of  a  debt 
and  returned  $10  worth  of  merchandise.  The  entry  in  the 
cash  book  records  a  receipt  of  only  $90  and  the  return  book 
a  return  of  $20.  The  money  not  properly  accounted  for  was 
taken  by  the  bookkeeper.  In  reporting  these  facts  state 
where  in  this  transaction  you  find  a  defalcation,  a  fraud 
committed,  or  an  embezzlement. 

Question  309 
What  method  would  you  adopt  to  prove  the  outstanding 
certificates  of  stock  to  be  correct  as   represented  on  the 
transfer  ledger  ? 


PENNSYLVANIA 


Question  310 

How  far  should  an  auditor  inquire  into  the  work  of  his 
predecessor,  and  what  circumstances  might  affect  his  de- 
cision upon  this  point? 

Question  311 

Of  what  use  is  the  minute  book  of  a  corporation  to  an 
auditor  ? 

Question  312 
Of  what  use  are  partnership  papers  to  an  auditor? 

Question  313 

You  are  called  upon  to  audit  the  disbursements  of  a 
treasurer's  account  of  a  manufacturing  company.  The 
voucher  system  is  in  use.  Five  thousand  vouchers  are  in- 
volved, these  being  paid  by  bank  check  which  is  attached  to 
its  voucher,  or  one  of  several  it  may  have  paid.  You  are 
expected  to  examine  all  the  vouchers,  although  a  number  of 
them  may  have  been  journalized. 

State  your  method  of  procedure,  also  how  you  know  you 
have  seen  every  voucher  issued  in  the  period  under  review. 
While  this  is  going  on,  and  may  occupy  some  weeks  in  its 
discharge,  office  boys,  clerks,  manager,  superintendents  have 
access  to  the  vouchers,  and  are  allowed  to  take  out  and  re- 
turn for  reference  purposes  of  their  own  at  will. 

73 


74  C.    P.    A.    AUDITING    QUESTIONS 

Question  SlJf 

How  would  you  audit  the  receipts  of  a  treasurer,  they 
being  deposited  in  the  several  depositories  of  the  company? 
If  not  all  deposited,  what  would  you  do  to  verify? 

Question  SI 5 

A  bookkeeper  of  a  manufacturing  concern  fails  to  make 
all  proper  charges  of  time  sales.  No  order  book  was  kept. 
He  retains  twelve  to  fifteen  hundred  dollars  yearly  for  many 
years  of  payments  received  on  account  of  these  time  sales, 
by  cashing  the  checks  received  in  due  course,  out  of  the 
drawer,  and  deposits  the  said  checks  regularly  in  firm's  bank 
account,  properly  indorsed  by  firm.  How  would  you  detect 
this? 

Question  SI  6 

In  auditing  the  books  of  a  department  store  where  sales 
checks  are  used,  and  are  sent  at  once  to  the  cashier  with 
money  offered  in  payment,  should  there  be  collusion  between 
several  salesmen  and  cashier  by  which  a  certain  amount  is 
retained  by  cashier  for  subsequent  division  among  himself 
and  associates  in  these  transactions,  he  destroying  the 
checks,  how  would  you  detect  this  and  what  method  would 
you  suggest  for  its  suppression  ? 

'Question  S17 

If  you  are  restricted  in  the  scope  of  your  auditing  on  a 
set  of  books,  what  part  should  you,  as  an  auditor,  insist 
upon  doing? 

Question  S18 
If  you  are  called  upon  to  audit  the  accounts  of  a  trust 


PENNSYLVANIA 


75 


company  or  building  and  loan  association  whose  principal 
investment  may  be  mortgages,  how  would  you  prevent  the 
introduction  of  cancelled  or  fictitious  mortgages? 

Question  319 

In  auditing  the  accounts  of  a  firm  you  find  a  number  of 
dishonored  and  overdue  notes  which  form  part  of  the  bal- 
ance of  Bills  Receivable  account.  State  fully  what  you 
would  do  with  these. 

Question  320 

How  would  you  audit  the  accounts  of  a  corporation 
whose  capital  was  invested  in  the  entire  capital  stock  and 
bonds  of  a  number  of  other  corporations,  and  arrive  at  a 
correct  result  as  to  the  profits  of  the  company?  Answer 
fully  and  give  reasons  for  your  action. 

Question  321 

What  would  be  your  mode  of  procedure  in  ascertaining 
the  earnings  of: 

Gas  companies? 
Electric  lighting  companies? 
Passenger  railroads? 
Answer  fully,  explaining  the  different  accounts  of  each, 
going  into  operating  expenses  and  betterments. 

Question  322 

In  auditing  trust  companies  holding  funds  of  a  dece- 
dent's estate,  what  are  your  duties  as  to  the  investments 
made  from  such  funds? 

Question  828 
How  far  does  your  duty  as  an  auditor  require  you  to  go 


76  C.    P.    A.    AUDITING    QUESTIONS 

outside  of  the  books,  in  furnishing  a  statement  of  the  con- 
dition of  a  business  at  a  given  time  ? 


Question  32J^ 

Under  what  conditions  would  amounts  be  charged  to 
betterments  at  one  time,  and  charged  to  operating  expenses 
at  a  later  date  in  railroads,  electric  companies,  and  gas  com- 
panies ? 

Question  325 

In  ascertaining  the  profit  or  loss  of  a  company  which 
had  been  purchased  for  a  stated  amount  of  stock  and  bonds 
of  a  new  company,  without  an  inverttorv  of  the  plant  in 
detail,  how  would  you  arrive  at  a  fair  basis  of  yearly  depre- 
ciation of  plant? 


Question  S26 

On  a  suspected  embezzlement  in  a  bank,  how  would  you 
make  a  quick  preliminary  examination  ? 


■Question  S27 

Your  certificate  is  desired  by  your  client  to  be  presented 
to  a  mercantile  agency.  Give  your  mode  of  procedure  to 
get  at  a  fair  report,  and  give  illustration  of  such  report, 
using  your  own  figfures. 

Question  328 

State  how  you  would  make  an  examination  of  street 
railway  and  electric  lighting,  and  gas  companies,  and  what 
points  you  would  examine  with  great  care. 


PENNSYLVANIA  77 

Question  829 

Give  your  mode  of  procedure  in  examination  of : 

(a)  Industrial  corporation 

(b)  Manufacturing  business  (partnership) 

Question  330 

When  a  number  of  corporations  are  operating  under 
their  own  charters,  but  managed  and  controlled  by  one 
other  corporation,  how  would  you  state  the  results  of  the 
business : 

(a)  When  the  controlling  corporation  owns  a  ma- 

jority of  the  stock  of  each  of  the  other  cor- 
porations? 

(b)  When  the  controlling  corporation  owns  all  of  the 

stock  of  the  other  corporations? 

Question  331 

Give  your  mode  of  procedure  in  the  examination  of  a 
building  and  loan  association. 

Question  332 

Write  a  report  of  your  audit  of  not  more  than  one  hun- 
dred words : 

fa)   When  the  books  are  properly  kept 
(b)   When  the  books  are  improperly  kept 
using  your  own  figures  in  both  cases  and  showing  the  im- 
proper entries  in  the  last  case. 

'Question  333 

In  case  a  corporation  of  five  persons  owninitr  all  the 
stock  should  credit  each  party  in  proportion  to  their  several 
holdings  with  the  profits  as  shown  by  the  books,  without 


^8  C.    p.    A.    AUDITING    QUESTIONS 

formally  declaring  a  dividend,  and  the  said  stockholders 
were  also  credited  with  interest  on  the  undrawn  credit  bal- 
ance, what  would  be  your  action? 

Question  33^ 

Take  up  a  business  you  are  familiar  with  and  state  fully 
how  you  made  an  audit. 

Question  335 

Explain  the  difference,  if  any,  between  an  audit  and  an 
examination. 

Question  336 

How  would  you  audit  the  stock  certificate  book  of  a 
corporation : 

(a)  When  the  corporation  has  no  registrar? 

(b)  When  the  corporation  has  a  registrar? 

Question  337 

In  a  business  consisting  of  five  separate  departments 
there  is  kept  a  general  ledger  containing  Capital  account, 
the  speculative  accounts,  such  as  Merchandise,  Expenses, 
etc.,  and  accounts  with  each  separate  department;  sales 
ledgers  containing  the  accounts  of  customers;  and  a  pur- 
chase ledger  containing  the  accounts  of  foreign  and  domestic 
creditors. 

In  the  general  ledger  each  department  account  is  charged 
with  all  the  purchases  made  for  the  department,  and  cred- 
ited with  cash  received  and  allowances  on  account  of  sales 
of  said  department.  The  sales  ledgers  contain  the  different 
customers'  accounts,  showing  charges  for  sales  and  credits 
for  cash,  allowances,  etc.,  on  account  of  sales.     The  pur- 


PENNSYLVANIA 


79 


chase  ledger  contains  the  accounts  of  the  different  creditors, 
showing  credits  for  merchandise  and  charges  for  cash. 

In  making  an  audit  of  the  books,  how  would  you  deter- 
mine that  the  profit  or  loss  for  each  department  had  been 
properly  stated  for  a  given  period? 

Question  S38 

In  three  successive  fiscal  years  a  manufacturing  cor- 
poration values  its  supplies,  etc.,  in  hand  at  cost,  with  de- 
ductions for  deterioration  as  follows :  at  end  of  first  year, 
5%  ;  at  end  of  second  year,  10%  ;  and  at  end  of  third  year, 
15%.  With  the  inventory  taken  on  this  basis  the  profits 
for  the  second  year  did  not  equal  the  dividends  declared, 
and  surplus  was  intrenched  upon ;  and  in  the  third  year  the 
dividend  paid  was  so  much  in  excess  of  profits  that  the  sur- 
plus was  entirely  exhausted  and  a  debit  balance  created  in 
the  Profit  and  Loss  account. 

In  auditing  the  books,  how  would  you  treat  the  above 
condition  in  your  report? 

Question  339 

A  wool  dealer's  business  consists  of  the  following  trans- 
actions : 

(a)  Buying  and  selling  for  his  own  account. 

(b)  Receiving  on  consignment  and  selling  for  com- 

mission. 

(c)  Consigning  to  other  dealers  for  sale  for  his  ac- 

count. 

All  wool  received,  whether  purchased  or  consigned,  is 
charged  to  Merchandise  account  and  credited  to  the  vendors 
or  consignors ;  and  all  wool  disposed  of,  whether  consigned 


go  C.    P.    A.    AUDITING    QUESTIONS 

or  sold,  is  credited  to  Merchandise  account  and  charged  to 
the  purchasers  or  consignees.  The  prices  in  the  pro  forma 
invoices  of  consigned  goods  invariably  differ  from  the  prices 
shown  in  the  account  sales  rendered  to  consignors  or  re- 
ceived from  consignees.  At  the  end  of  the  year  he  prepares 
a  statement  treating  all  wool  in  his  possession  as  inventory, 
and  credits  Merchandise  account  therewith ;  all  debit  bal- 
ances on  account  of  goods  sold  or  consigned  by  him,  as  ac- 
counts receivable,  and  all  credit  balances  on  account  of 
goods  purchased  or  consigned  to  him,  as  liabilities.  The 
accounts  are  clerically  correct;  you  are  asked  to  audit  his 
accounts  and  certify  to  the  correctness  of  his  statement. 
How  would  you  proceed  to  do  this?  Write  a  report  thereon 
not  exceeding  two  hundred  words. 

Question  SJfO 

A  and  B  formed  a  partnership  in  a  manufacturing  busi- 
ness, each  contributing  $25,000.  The  business  was  con- 
ducted in  a  building  owned  by  B,  for  which  B  was  to  be 
paid  $10,000  rent  per  year.  During  three  given  years  the 
profit  averaged  $10,000;  and  A  drew  out  $1,000,  $5,000, 
and  $10,000  in  the  respective  years,  and  B  drew  out  $3,000, 
$4,000,  and  $5,000.  The  rent  account  was  adjusted  in  the 
books  by  crediting  B  in  each  year  with  $5,000  and  charging 
this  amount  the  first  year  to  A,  the  second  year  to  expense, 
and  the  third  year  to  B. 

In  an  audit  of  the  books,  how  would  you  state  the  ac- 
counts at  the  close? 

Question  SJfl 

How  would  you  proceed  in  making  an  audit  of  a  stock 
broker  who  also  does  a  banking  business?  Give  full  par- 
ticulars, with  an  illustration,  using  your  own  figures. 


PENNSYLVANIA  gl 

Question  3^2 

How  would  you  proceed  in  making-  an  audit  of  the  books 
of  a  municipality?  Give  full  particulars,  with  an  illustra- 
tion, using  your  own  figures. 

Question  SJ^S 

How  would  you  proceed  in  making  an  audit  of  an  es- 
tate, including  principal  personality  and  income  personality, 
and  real  estate  and  real  estate  income,  where  the  interests  of 
distributees  include  legacies  to  lineals  and  collaterals,  an- 
nuities, widow's  dower,  life  estates,  and  estates  in  remain- 
der ?  Give  full  particulars,  with  an  illustration,  using  your 
own  figures. 

Question  SJfJf 

Describe  in  detail  your  method  of  conducting  an  audit 
of  a  commission  house. 

Question  $45 

If  in  examining  a  manufacturing  corporation  using  a 
cost  system  in  their  shops,  you  find  a  large  difference  be- 
tween the  general  books  and  the  cost  in  the  cost  books,  in 
what  accounts  would  you  probably  be  able  to  trace  the  dif- 
ference ? 

Question  346 

Is  there  any  difference  between  a  thorough  audit  and  an 
examination?    If  so,  state  fully  wherein  they  differ. 

Question  3^7 

Give  a  statement  as  to  the  duties  of  an  auditor  in  rela- 
tion to  the  bookkeeper  and  to  his  clients,  and,  if  auditing  a 
corporation,  as  to  the  stockholders  of  the  corporation,  cov- 
ering confidences  and  personal  contact. 


82  C.    p.    A.    AUDITING    QUESTIONS 

Question  SJ^S 

A  firm  of  brickmakers,  under  the  terms  of  their  20  years' 
lease,  agree  that  at  the  close  of  the  term  they  will  level  the 
ground,  cover  with  soil,  and  generally  restore  to  previous 
conditions  for  agricultural  purposes. 

(a)  How  would  you  deal  with  this  liability  in  the  ac- 
counts of  the  firm  ? 

(b)  Assume  five  years  of  term  have  expired  and  none 
of  the  work  done  and  no  provision  made.  How  would  you 
adjust  matters  at  this  date? 

Question  SJf.9 

The  following  are  the  accounts  of  the  Real  Estate  In- 
vestment Company  on  June  30,  1906.  State  (limiting  your 
answer  to  200  words)  the  manner  in  which  you  would  con- 
duct an  audit. 

BALANCE  SHEET,  JUNE  30,  1906. 

Assets 

Real  estate  improved $450,000.00 

unimproved 175,000.00 

Office   furniture 6,850.00 

Investments     in     stock     of    other 

companies 76,000.00 

Rents  accrued  but  unpaid 20,500.00 

Cash   22,150.00 

Total  assets $750,500.00 

Liabilities 
Capital    stock.    10,000   shares   $100 

each,  $50  paid $500,000.00 

Mortgage  bonds   (5%) 200,000.00 

Reserve  for  depreciation 18,625.00 

Income  account 31,875.00 

Total   $750,500.00 


PENNSYLVANIA 


83 


INCOME  ACCOUNT  FOR  THE  YEAR  ENDING  JUNE  30,  1906 

Credits 

Rentals   $84,500.00 

Interest  on  investments 3,000.00 

Total  credits $87,500.00 

Debits 

Interest  on  mortgages $22,000.00 

Taxes 6,950.00 

Water   rents 4,225.00 

Repairs  and  alterations 11,500.00 

Office  and  miscellaneous  expenses  6,635.00 

Fire  insurance 610.00 

Title  insurance 417.00 

Legal  expenses 2,500.00 

Auditors'   fees 788.00 

Profit  for  year 31,875.00 

Total   $87,500.00 


Arising  out  of  the  last  question,  having  completed  the 
audit,  draw  up  a  short  and  concise  report  to  the  directors, 
calling  their  attention  to  any  points  in  the  accounts  to  which 
notice  should  be  specially  directed. 

Question  350 

In  your  audit  there  are  two  possibilities  against  which 
you  would  rigorously  guard : 

(a)  The  overstating  of  debtor  balances. 

(b)  The  understating  of  creditor  balances. 

Set  out  all  practical  checks  you  can  think  of. 


84  C.    P.    A.    AUDITING    QUESTIONS 

Question  351 

A  concern  engaged  in  building  locomotives  wishes  to 
equip  their  machine  shop  with  some  new  machinery  of 
standard  types,  and  determines  to  have  it  made  in  their  own 
plant  by  their  own  workmen  from  material  which  they  have 
in  stock.  By  this  means  it  will  cost  much  less  than  if  they 
bought  it  from  outsiders.  They  desire  consequently  to 
charge  ^'Machinery  and  Large  Tools"  account  with  the  cur- 
rent market  price  of  the  machinery  so  produced,  on  the 
ground  that  their  workmen,  while  making  it,  have  been  de- 
tached from  other  profitable  employment. 

Discuss  this  question  pro  and  con,  and  say  what  you 
would  advise  to  be  done,  giving  your  reasons. 


Question  352 

To  what  extent  would  you  criticize  the  management  in 
your  report? 


Question  353 

Describe  an  audit  of  a  trust  company  doing  a  banking 
business,  acting  as  trustee  for  estates,  trustee  for  bondhold- 
ers of  a  corporation,  and  issuing  title,  surety  and  fidelity 
bonds,  giving  your  views  as  to  how  you  would  arrive  at 
the  liability  of  the  company  as  to  the  title,  surety  and  fidelity 
bonds. 

Question  35Jf. 

The  report  to  the  Comptroller  of  the  Currency  by  the 
Blank  National  Bank  on  June  15,  1906,  and  again  on  July 
20, 1907,  showed  as  follows : 


PENNSYLVANIA 

RESOURCES 

June  15,  1906    July  20,1907 

Loans  and  discounts $3,551,140.20    $3,670,785.13 

U.  S.  bonds  to  secure  circula- 
tion and  U.  S.  deposits. . . .  547,000.00         450,000.00 
Premiums  on  U.  S.  bonds. 
Bonds,  securities,  etc 


85 


13,000.00  12,000.00 

370,244.25         410,570.75 


70,694.16         129,198.80 
613,753.18         520,734.39 


Banking  house,  furniture,  etc 

Due  from  banks  and  bankers 

Royal  Bank  of  Dublin,  Ireland  36,215.48  42,486.15 

Due     from     approved     reserve 

agents   537,456.91  472,646.47 

Checks  and  other  cash  items..  24,247.54  83,411.83 

Exchanges  for  Clearing  House  281,933.18  199,179.10 

Notes  of  other  national  banks  2,850.00  200.00 

Fractional  currency,  etc 495.55  1,974.61 

Lawful  money  reserve  in  bank  411,218.15  522,225.80 
Redemption    fund    with    U.    S. 

Treasurer   20,250.00  24,250.00 


Total   $6,480,498.60    $6,539,663.03 


LIABILITIES 

Capital  stock  paid  in $600,000.00  $600,000.00 

Surplus  fund 500,000.00  550,000.00 

Undivided  profits  less  expenses, 

etc 115,754.47  109,566.46 

National      bank      notes      out- 
standing     408,000.00  400,400.00 

Due  to  banks  and  bankers 956,437.76  1,119,598.80 

Individual   deposits    subject   to 

check  3,463,436.50  2,802,915.26 

Certificates  of  deposit 33,665.00  15,585.56 

Certified    checks 6,226.71  4,124.50 

Cashier's  checks  outstanding..  142,978.16  402,472.45 

United  States  deposits 144,000.00  45,000.00 

Bonds  borrowed 110,000.00 

Notes  and  bills  discounted 490,000.00 


Total   $6,480,498.60    $6,539,663.03 

Accounts   current   received    from   the   Royal   Bank  of 


86  C.    P.    A.    AUDITING    QUESTIONS 

Dublin  show  a  credit  balance  in  favor  of  the  Blank  National 
Bank  on  June  15,  1906,  of  £7,624/8/4,  and  on  July  20, 
1907,  of  £9,337/14/6. 

(a)  You  are  retained  by  the  board  of  directors  of  the 
bank  to  make  an  examination  on  July  20,  1907,  and  to  make 
an  audit  in  connection  therewith  of  the  accounts  from  June 
15,  1906.  State  how  you  would  propose  to  carry  out  these 
instructions,  describing  your  process  in  the  order  in  which 
you  think  the  several  steps  should  be  taken,  and  discussing 
carefully  each  item  shown  on  the  foregoing  statements,  to- 
gether with  such  other  accounts  appearing  in  connection 
with  your  answer  to  part  (d)  of  this  question  as  you  think 
should  be  examined. 

(b)  Do  the  ledger  balances  against  the  Royal  Bank  of 
Dublin  show  the  correct  status  of  this  account  ?  How  would 
you  prove  that  they  do,  and,  if  you  found  the  balances  stated 
above  to  be  wrong,  what  entry  would  you  make  to  correct  ? 

(c)  Describe  more  fully  the  "liability  ledger"  (or  what 
is  known  in  some  banks  as  the  ^'credit  ledger"  and  in  others 
as  the  "line  ledger")  and  state  whether  you  think  it  should 
prove  with  any  general  ledger  account  or  be  kept  by  single 
entry  purely.  If  the  former,  show  how  you  would  accom- 
plish your  purpose. 

(d)  From  the  foregoing  and  your  knowledge  of  bank- 
ing, outline  a  system  of  accounts  suitable  for  the  Blank  Na- 
tional Bank,  describing  (in  sufficient  detail  to  indicate  your 
understanding)  the  principal  books  and  blanks  used  in  the 
several  departments,  but  showing  no  forms. 

Question  355 

What  are  the  distinguishing  features  of : 
Mortgage  bond? 
Collateral  trust  bond? 
Income  bonds  ? 


PENNSYLVANIA  87 

Question  356 

What  is  the  purpose  and  method  of  registering  stock 
certificates  and  other  corporate  securities? 

Question  357 

The  following  are  summarized  trial  balances  of  a  manu- 
facturing company  as  of  December  31,  1906,  and  June  30, 
1907: 

December  31,  1906  June  30,  1907 

Capital  stock $300,000.00  $300,000.00 

Debentures 100,000.00  100,000.00 

Cash  $25,127.96  $34,321.90 

Inventory   351,362.14  396,609.50 

Accounts  payable  15,256.59  19,690.23 
Accounts     receiv- 
able          24,200.50                              54,009.16 

Real  estate  build- 
ings,   etc 110,910.54  115,602.73 

Stocks  and  bonds        21,650.36  22,321.14 
Unexpired    insur- 
ance             1,550.25  1,824.67 

Surplus 119,545.16  119,445.16 

Profit     and     loss 

account,    1907  85,553.71 

$534,801.75    $534,801.75    $624,689.10    $624,689.10 


The  books  of  the  company  were  audited  as  at  December 
31,  1906,  and  in  making  up  the  accounts  at  that  date  the 
auditors  made  the  following  adjustments  of  the  above  trial 
balance  figures : 

(1)  Transferred  to  profit  and  loss  $8,462,14,  which 

had  been   improperly   charged   to   real   estate 
and  buildings. 

(2)  Wrote  off  $3,600  for  depreciation  of  buildings, 

etc. 


gg  C.    p.    A.    AUDITING    QUESTIONS 

(3)  Brought  into  account  expense  liabilities  amount- 

ing to  $1,250  which  had  been  incurred  in  1906, 
but  were  not  entered  on  the  books  until  Jan- 
uary, 1907. 

(4)  Reduced  the  value  of  inventory  by  $14,920. 

The  auditors  were  again  called  in  at  June  30,  1907,  and 
found  that  the  adjustments  made  by  them  at  the  previous 
audit  had  been  ignored  so  far  as  the  books  were  concerned. 
They  also  found  that  during  the  half  year  $1,000  had  been 
charged  to  buildings  instead  of  to  expense  account ;  that  no 
provision  had  been  made  for  depreciation  during  the  year 
amounting  to  $1,800,  and  that  the  inventory  of  June  30th 
was  overvalued  to  the  extent  of  $9,840.  On  the  other  hand, 
the  insurance  unexpired  was  incorrectly  calculated  and 
should  have  been  $2,774.67  instead  of  $1,824.67. 

(1)  Prepare  the  audited  balance  sheet  at  June  30,  1907. 

(2)  State  the  amount  of  the  profits  for  the  half  year  as 
audited. 

(3)  Prepare  schedules  showing  how  the  audited  balance 
sheet  is  made  up  and  how  it  can  be  connected  with  the  book 
figures. 

Question  358 

What  is  the  distinctive  difference  between  an  insurance 
company  that  is  known  as  a  "mutual  company,"  and  one 
that  is  known  as  a  "stock  company"  ? 

Question  359 

You  are  retained  by  the  Appliance  Manufacturing  Com- 
pany to  audit  its  accounts  for  the  year  ending  June  30,  1907, 
and  to  prepare  the  balance  sheet,  trading  and  profit  and  loss 
accounts  for  the  year. 

You  are  expected  to  write  a  brief  report  of  not  less  than 


PENNSYLVANIA 


89 


200  and  not  more  than  400  words  dealing  with  your  audit, 

showing  its  scope  and  discussing  au)^  matters  relating  to 
the  accounts  which  may  seem  to  you  to  be  of  interest. 

The  company  was  incorporated  on  July  1,  1906,  and  its 

balance  sheet  on  that  date  showed  as  follows : 

ASSETS 

Cash  $12,680.92 

Bills  receivable 2,200.00 

Book  accounts  receivable 19,501.33 

Merchandise  material  on  hand....  9,554.43 

Machinery  and  tools 129,355.01 

Furniture  in  office  and  store 11,762.18 

Expenses  of  incorporation 500.00 

Book  accounts  receivable  in   sus- 
pense     1,983.40 

Good-will   40,000.00 

Total   $227,537.27 

LIABILITIES 

Bills  payable $10,901.07 

Book  accounts  payable 15,617.04 

Capital  stock 200,000.00 

Reserve    for    suspended    accounts 

receivable   1,019.16 

Total   $227,537.27 

The  trial  balance  of  June  30,  1907,  was  as  follows : 

Cash  $5,259.80 

Notes    receivable 5,048.75 

payable $16,922.81 

Sales 240,172.56 

Materials  and  supplies 52,088.94 

Sundry  merchandise  bought 2,869.80 

Selling   wages 22,400.04 

Manufacturing  wages 88,317.70 

Miscellaneous  receipts 549.20 

Office  salaries 5,802.50 


go  C.    P.    A.    AUDITING    QUESTIONS 

Trial  Balance  (Continued) 

Manufacturing  expenses 15,353.16 

Office   expenses 2,496.14 

General  selling  expenses 3,491.50 

Advertising   2,064.33 

Light,  heat,  and  power 3,121.97 

Rent  of  factory 4,000.00 

"      "    store  and  office 1,860.29 

Repairs  to  machinery,  etc 845.78 

Delivery   expenses 2,201.01 

Interest  and  discount 738.40 

Commissions   5,089.30 

Machinery  and  tools 132,817.24 

Dividend  (paid  January  10,  1907) .  6,000.00 

Furniture,  etc.,  in  store  and  office  12,016.45 

Book  accounts  receivable 58,935.20 

payable 18,311.16 

Expenses  of  incorporation 500.00 

Reserve  for  suspended  accounts..  320.59 

Good-will    40,000.00 

Capital  stock 200,000.00 

Accounts  receivable  in  suspense..  2,316.84 

Totals   $475,955.73    $475,955.73 

The  inventory  of  merchandise  and  material  amounts  to 
$12,453.90. 

You  discover  the  following  facts  not  disclosed  by  the 
books : 

(a)  Invoices  not  entered: 

Maryland  Steel  Co.,  dated  June  15,  1907, 

for  steel $165.00 

York  Safe  &  Lock  Co.,  dated  June  1,  1907, 

for  office  safe : 110.00 

Vulcan    Coal    Co.,    dated    May   20,    1907, 

for  coal 42.50^    $317.50 


(b)  The  company  made  in  its  shop  for  its  own  use  five 
machines,  in  the  construction  of  which  it  used  material  cost- 
ing $525,  and  the  mechanics'  wages  amounted  to  $760. 


i 


PENNSYLVANIA  91 

Question  360 

Wherein  do  municipal  accounts  differ  from  private  ac- 
counts as  to  capitalization  and  revenue  ? 

Explain  fully  as  to  the  receipts  and  disbursements  of 
funds. 

Question  361 

Describe  the  functions  and  method  of  operation  of  a 
stock  exchange  clearing  house  and  point  out  the  differences 
between  a  stock  exchange  clearing  house  and  a  bank  clearing 
house. 

Question  362 

The  B  &  E  Company  is  a  wholesale  trading  concern, 
having  its  headquarters  in  Lancaster,  Pa.,  and  maintaining 
branch  stores  in  a  number  of  cities;  Richmond,  Va.,  among 
others.  These  branch  stores  receive  their  goods  upon  con- 
signment from  the  head  office ;  keep  the  accounts  with  their 
customers ;  make  collections  thereon ;  keep  local  bank  ac- 
counts; pay  current  expense  bills  and  remit  their  excess 
funds  from  time  to  time  to  the  head  office.  The  manager 
of  the  Richmond  branch  is  employed  on  a  small,  fixed  salary 
and  a  commission  based  on  the  sales,  the  latter  compensation 
being  forwarded  to  him  quarterly  by  check  from  the  Lan- 
caster office.  Without  intending  to  steal,  he  adopted  the 
habit  of  anticipating  the  arrival  of  his  check  and  withheld 
collections  received  from  customers,  making  no  entries 
therefor  upon  the  books  for  the  time  being,  but  being  care- 
ful, however,  not  to  hold  any  one  item  longer  than  a  few 
days,  thus  constantly  replacing  out  of  the  current  receipts 
items  previously  withheld.  Upon  receipt  of  his  quarterly 
check  for  commissions  he  would  at  once  make  good  the 
amount  he  had  in  the  above  manner  advanced  from  the  com- 
pany's funds  to  himself. 


C)2  C    P.    A.    AUDITING    QUESTIONS 

(a)  If  you  were  instructed  to  audit  the  accounts  of 
B  &  E  Company,  including  those  of  the  branch  offices,  would 
your  audit  disclose  this  condition,  and,  if  so,  concisely  and 
carefully  describe  the  course  you  would  pursue. 

(b)  What  criticisms  have  you  to  offer  relative  to  the 
administrative  plan  of  the  B  &  E  Company  as  outlined 
above? 

(c)  Describe  clearly  the  form  of  accounts  you  think  is 
best  adapted  to  this  business  if  it  were  operated  in  accord- 
ance with  the  methods  best  suited,  in  your  judgment,  for  the 
management  of  a  business  maintaining  branch  stores. 

Question  363 

You  are  instructed  by  the  receiver  of  an  importing  and 
trading  concern  to  examine  the  accounts  and  report  to  him : 

(a)  The  financial  position  of  the  concern,  and 

(b)  The  causes  that  have  mainly  contributed  to  the 

failure. 

In  your  answer,  prepare  a  statement  of  the  assets  and 
liabilities  in  such  form  as  you  think  should  be  used  for  the 
information  of  the  receiver  and  the  creditors,  and  under  (b) 
state  the  matters  to  which  you  would  direct  your  attention, 
having  in  mind  the  nature  of  the  business,  and  how  you 
would  proceed  with  your  investigation. 

Question  36^ 

The  North  &  South  R.  R.  Company  has  demolished  its 
old  wooden  station  at  a  certain  city  on  its  line,  and  has 
erected  in  its  place  a  larger  and  more  ornate  structure  of 
brick  and  stone  at  a  cost  of  $100,000  in  excess  of  the  book 
value  of  the  old  building,  after  deducting  the  salvage.  Bear- 
ing in  mind  that  this  expenditure  of  $100,000  does  not  ma- 
terially increase  the  earning  capacity  nor  decrease  the  oper- 


PENNSYLVANIA  93 

ating  expenses  of  the  company,  what  disposition  should  be 
made  of  this  item  in  the  accounts  ?  State  the  general  prin- 
ciples that  should  govern  an  accountant  in  dealing  with  this 
class  of  expenditure,  whether  occurring  in  a  railroad  or  any- 
other  property. 

Question  365 

Describe  a  system  of  internal  check  for  use  in  a  gas 
company  to  protect  it  from  loss  of  revenue. 

Question  366 

What  methods  would  you  adopt  in  an  audit  of  a  street 
and  interurban  railway  to  prove  the  earnings  ? 

If  you  found  that  proper  precautions  had  not  been  taken, 
describe  the  plans  you  would  recommend  to  such  a  company 
so  as  to  insure  the  collection  of  all  of  its  earnings. 

Question  367 

A  coal  mining  corporation  proposes  to  issue  bonds  of 
the  denomination  of  $1,000  each,  to  the  amount  of  $500,000, 
on  January  1,  1911,  bearing  interest  at  6%  per  annum,  pay- 
able semiannually,  January  1  and  July  1.  Under  the  terms 
of  the  mortgage  a  fund  equal  to  ten  (10)  cents  per  ton  of 
coal  shipped  is  to  be  set  aside  semiannually  for  the  first  three 
years  and  at  the  rate  of  twelve  (12)  cents  per  ton  thereafter, 
the  fund  to  be  used  as  follows : 

( 1 )  To  pay  the  interest  on  the  bonds. 

(2)  After  paying  interest  the  balance  is  to  be  used  to 

redeem  and  cancel  bonds  at  par  as  of  the  dates 
on  which  the  interest  is  paid;  any  balances 
remaining  in  the  fund  thereafter  to  be  added 
to  the  fund  of  the  next  period. 


94  C.    P.    A.    AUDITING    QUESTIONS 

It  is  estimated  that  the  tonnage  will  be  400,000  tons  each 
six  months  for  the  first  three  years  and  500,000  tons  each 
six  months  thereafter. 

Prepare  a  tabular  statement  showing  concisely  the  oper- 
ations and  the  result  of  the  carrying  out  of  the  proposed 
plan  based  on  the  foregoing  estimates. 

Question  368 

You  are  called  on  to  make  the  annual  audit  of  accounts 
of  the  Manufacturing  and  Trading  Corporation,  for  the 
year  ending  Tuesday,  31st  May,  1910,  a  concern  owning 
its  own  plant  subject  to  a  mortgage,  the  interest  on  which 
is  due  semiannually,  January  1  and  July  1. 

It  markets  its  own  product  and  several  hundred  men 
are  employed  in  the  manufacturing  plant,  wages  being  paid 
weekly  on  Wednesdays  for  time  up  to  and  including  pre- 
ceding Fridays.  The  financial  books  are  kept  double  entry, 
all  the  general  accounts  and  the  accounts  payable  being  in 
one  large  bound  ledger.  The  main  property  and  operating 
accounts  are :  Merchandise,  for  purchases  of  material,  etc., 
sales  of  product,  and  adjustments  in  respect  of  both ;  Wages, 
for  all  wages  paid ;  Factory  Expenses,  including  repairs  to 
machinery  and  building,  machinery  supplies,  power,  and 
insurance;  Expense  account,  for  salaries  of  ofificers,  office 
force,  and  salesmen,  advertising,  traveling  and  other  general 
expenses ;  Real  Estate,  Machinery  and  Equipment,  Bills  Re- 
ceivable, Bills  Payable,  Accounts  Payable,  and  Mortgages. 

The  customers'  accounts  are  in  a  separate  ledger.  The 
other  books  and  records  are :  a  bound  order  book,  a  bound 
sales  book,  a  main  cash  book  (discount  columns  both  sides) 
containing  entries  of  payments  by  check  and  in  currency — 
any  cash  receipts  from  customers  being  usually  retained  at 
the  office  and  used  for  making  currency  payments;  and 
checks  drawn  for  amounts  slightly  in  excess  of  pay-roll 


PENNSYLVANIA 


95 


requirements,  the  excess  going  into  the  drawer ;  a  pay  book 
or  journal  containing  entries  of  purchases  of  materials  and 
adjustments  thereof,  adjustments  of  sales,  bills  receivable, 
and  other  items  of  a  general  nature;  a  bills  receivable  and 
payable  book;  capital  stock  ledger,  certificate  book,  and 
fer  book ;  minutes ;  time  records  and  pay-rolls. 

The  inventory  has  been  prepared  by  the  company,  the 
valuations  being  at  selling  prices  less  an  allowance  for  cost 
of  marketing.  The  minutes  disclose  no  authority  for  the 
amounts  of  salaries  drawn  by  or  credited  to  the  officers. 

(a)  State  the  work  you  would  propose  to  perform  in 
making  the  audit. 

(b)  Write  a  comprehensive  report  on  the  audit  and  on 
the  balance  sheet  and  profit  and  loss  account  which  you 
would  submit,  and 

(c)  State  the  recommendations,  if  any,  you  would  make 
regarding  methods  of  accounting  and  administration. 

Question  369 

The  Indiana  Manufacturing  Company  manufactures 
steam  engines  and  does  a  large  repair  business  upon  engines 
and  other  classes  of  machinery.  What  accounts  would  you 
provide  for  expenses  (other  than  selling)  which  cannot  be 
charged  directly  to  jobs  or  shop  orders  ?  Describe  the  va- 
rious methods  of  distributing  these  general  expenses,  fre- 
quently spoken  of  as  "shop  burden,"  to  the  several  shop  or- 
ders. Which  method  would  you  recommend  for  use  in  a 
factory : 

(a)  Containing  a  large  number  of  costly  machines? 

(b)  Where  relatively  few  high-priced  machines  are 

used  and  where  there  is  a  large  proportion 
of  bench  work  by  skilled  employees? 


5|6  C.    p.    A.    AUDITING    QUESTIONS 

Question  370 

The  books  of  the  Mapes  &  Manning  Company,  man- 
ufacturers of  and  dealers  in  farm  implements,  show  for  the 
past  five  years  net  profits  as  follows : 

1906 $177,000 

1907 143,000 

1908 206,000 

1909 16,000 

1910 98,000 

You  are  instructed  by  a  banking  syndicate  to  examine 
the  accounts  of  the  company  and  report  upon  the  profits 
during  the  above  period.  In  the  course  of  your  examination 
you  ascertain  the  following  facts: 

Current  liabilities  were  not  taken  into  the  accounts,  as 
follows : 

January  1,  1916,        for  New  buildings $42,000 

Accrued  wages 5,300 

December  31,  1906,  Repair   charges $2,600 

Accrued  wages 2,900 

December  31,  1908,  Merchandise  invoices     $6,800 

Current  expenses...         5,400 

December  31,  1910,          Accrued   wages $3,200 

Materials    and    sup- 
plies     4.600 

Shop  equipment....  8,400 


At  December  31,  1910,  the  company  engaged  two  real 
estate  experts  to  appraise  its  land  and  buildings.  The  lower 
of  the  two  showed  a  present  value  of  $587,000,  and  this 
valuation  was  adopted  by  the  board  of  directors,  who  in- 
structed the  bookkeeper  to  charge  Real  Estate  account  and 
credit  Profit  and  Loss  at  the  above  date  with  the  difference 


PENNSYLVANIA  97 

between  the  foregoing  amount  and  the  book  figures  of 
$560,000. 

A  mortgage  of  $200,000,  bearing  5%,  remained  upon 
the  property  during  the  whole  of  the  period  under  review, 
and  interest  on  this  mortgage  was  charged  before  arriving 
at  the  book  profits. 

Satisfactory  provision  was  made  in  each  year  for  de- 
preciation of  buildings,  machinery,  etc. 

Revise  the  profits  for  each  year  in  accordance  with  the 
facts  disclosed  by  your  examination,  and  draft  the  form  of 
certificate  you  would  be  prepared  to  give  thereon  to  the 
bankers  for  prospectus  purposes. 

Assuming  that  after  submitting  this  certificate  to  your 
clients  they  prefer  instead  to  publish  a  certificate  showing 
the  average  profits  for  the  five-year  period,  what  position 
would  you  take  and  what  form  of  certificate  would  you  be 
willing  to  sign? 

Question  371 

A  manufacturing  concern  is  required  to  carry  a  six 
months'  supply  of  a  certain  kind  of  raw  material,  and,  as  the 
material  is  not  of  the  kind  that  can  be  purchased  every  day, 
they  must  purchase  it  at  any  time  it  is  offered  to  them.  For 
this  reason  the  prices  fluctuate  sometimes  very  considerably. 
When  they  purchase  this  material,  they  pay  cash  for  same 
and  have  the  material  shipped  in  as  wanted.  What  method 
would  you  use  in  arriving  at  the  cost  of  this  raw  material 
used  during  any  one  month  in  manufacturing? 

Question  872 

A  textile  mill,  employing  some  YOO  hands,  operates  five 
departments  with  a  superintendent  or  head  foreman  in  each. 
About  500  hands  are  paid  upon  a  piece-work  basis,  50  on  a 
part  piece-work  and  part  day  rate,  according  to  the  duties 


qS  c.  p.  a.  auditing  questions 

assigned  to  them  from  day  to  day;  100  are  on  a  straight  day 
rate  basis,  while  the  remainder  are  paid  weekly  salaries  but 
no  overtime.  Describe  clearly  and  concisely  the  methods 
you  would  recommend  for  assembling  and  recording  the 
data  entering  into  the  weekly  pay-roll.  Also  state  how  you 
would  have  the  pay-roll  prepared  and  the  wages,  as  shown 
thereon,  paid  to  the  hands,  having  in  view  both  economy 
in  the  clerical  work  and  securing  of  proper  safeguards 
against  frauds. 

Question  373 

(a)  How  should  advancements  which  appear  in  the 
inventory  and  appraisement  of  a  decedent's  estate  be  treated 
by  the  executors  in  distributing  the  principal  to  the  heirs? 

(b)  In  the  absence  of  instructions  in  the  will,  what  dis- 
position should  be  made  of  sale  of  "rights"  or  "warrants" 
by  an  executor? 

(c)  An  executor  of  an  estate  in  Pennsylvania  forecloses 
a  mortgage  owned  by  the  estate,  and  title  is  taken  to  the 
property,  the  property  remaining  in  the  estate  at  the  time 
of  filing  his  account.  How  should  the  transaction  appear  in 
his  account? 

Question  374 

The  following  is  a  financial  statement  of  the  Homestead 
Land  Company  on  commencement  of  business,  January  1, 
1908: 

ASSETS  LIABILITIES 

Land $500,000      Capital  stock $100,000 

Cash 70,000      Bonds  author- 
Discount  on  bonds 5,000         ized  $500,000 

Less  not  sold.       25,000     475,000 


Total $575,000  Total   $575,000 


PENNSYLVANIA 


99 


The  land  shown  represents  10,000  acres,  which  were 
acquired  at  the  rate  of  $50  per  acre.  The  bonds  issued  by 
the  company  are  dated  January  1,  1908,  maturing  January 
1,  1928,  and  bear  interest  at  5%  per  annum,  payable  July 
and  January  1st.  Under  these  bonds  the  company  is  re- 
quired to  pay  into  the  hands  of  the  trustee,  as  a  sinking 
fund  for  their  redemption,  the  sum  of  $50  for  each  acre  of 
land  for  which  the  company  has  received  full  payment  and 
conveyed  title.  (Note  that  the  company  has  complied  with 
this  requirement  during  the  year  and  the  trustee  has  advised, 
at  December  31,  1908,  that  he  had  in  his  possession  the  sum 
of  $153,500,  of  which  sum  $3,500  represented  interest  on 
the  funds  in  his  hands.) 

The  object  of  the  company  is  to  divide  its  property  into 
10-acre  plots,  which  it  sells  at  the  rate  of  $75  per  acre  when 
paid  for  in  cash,  or  $100  per  acre  when  the  plots  are  sold 
on  the  instalment  payment  plan.  This  latter  plan  provides 
for  the  payment  of  $20  per  acre  in  cash  at  the  date  of  pur- 
chase, and  the  balance  to  be  covered  by  four  notes  of  equal 
amounts,  maturing  one,  two,  three,  and  four  years  after  the 
date  of  purchase;  the  first  two  notes  not  bearing  interest, 
but  the  two  latter  to  bear  interest  at  the  rate  of  5%  per 
jannum.  During  the  year  ended  December  31,  1908,  300 
plots  were  sold  for  cash  and  title  conveyed  to  the  various 
purchasers ;  also  during  the  same  year  300  plots  were  sold 
on  the  instalment  plan"  as  outlined  in  the  foregoing. 
-Expenses  not  subject  to  inference  from  the  foregoing: 

Administration.  ..  ........  .$2,500 

Salaries. .    5,000 

, Advertising. . ..............    5,000 

Taxes  accrued,  not  paid. . . .   2,500 

Prepare  a  balance  sheet  at  December  31,  1908,  and  a 
profit  and  loss  account  for  the  year  ended  on  that  date. 


lOo  C.    p.    A.    AUDITING    QUESTIONS 

Question  375 

In  a  given  trade,  goods  are  purchased  on  terms  of  6% 
discount  for  cash  in  ten  days,  or  net  thirty  days.  In  certify- 
ing a  balance  sheet  in  this  trade,  how  would  you  deal  with 
the  question  of  this  discount  in  stating  the  value  of  the  in- 
ventory of  merchandise  on  hand?  Give  your  reasons  for 
the  treatment  you  would  advocate. 

Question  376 

You  are  retained  to  make  an  examination  of  the  ac- 
counts of  a  hardware  manufacturing  company,  and  prepare 
a  balance  sheet  and  a  statement  of  its  earnings  for  the  past 
ten  years,  the  examination  to  be  of  sufficient  scope  to  enable 
you  to  issue  a  certificate  to  the  balance  sheet  and  also  to 
give  the  assurance  that  the  statement  of  earnings  presented 
is  substantially  correct. 

Give  an  outline  of  your  audit  procedure,  showing  to 
what  extent  you  would  carry  your  examination  in  respect 
to  the  several  classes  of  assets  and  liabilities,  and,  if  it  were 
stated  to  you  that  depreciation  of  the  plant  and  equipment 
had  been  provided  for  through  the  inclusion  in  the  manu- 
facturing cost  of  expenditures  for  new  additions  and  bet- 
terments, what  method  would  you  take  to  ascertain  the  ex- 
tent of  such  provision? 

Question  377 

A  company  issues  $1,000,000  bonds  (denomination 
$1,000  each),  dated  January  1,  1910,  bearing  interest  at  5% 
and  maturing  January  1,  1920.  These  bonds  were  sold  at 
80%  of  their  par  value. 

The  mortgage  provides  for  a  sinking  fund  to  be  created 
by  annual  payments  of  $50,000,  and  at  December  31,  1911, 
the  balance  sheet  of  the  company,  among  other  items,  shows 
the  following  which  relate  to  these  transactions : 


PENNSYLVANIA  lOi 

Discount  on  bonds debit,    $    160,000.00 

Trustee  of  sinking  fund debit,         102,000.00 

First  mortgage  bonds. credit,     1,000,000.00 

On  January  1,  1912,  the  trustee  purchased  113  bonds 
out  of  the  funds  in  his  possession  at  $900  each,  which  were 
cancelled. 

State  what  entries  should  be  made  in  respect  to  these 
transactions;  also  give  your  views  as  to  the  proper  treat- 
ment of  discount  on  bonds,  both  as  to  when  they  are  pur- 
chased and  cancelled,  as  in  the  foregoing,  and  when  they 
are  not  redeemed  until  maturity. 

Question  378 

You  are  instructed  to  examine  and  report  upon  the 
accounts  of  an  electric  lighting  company  in  Upper  Wood- 
land, Penna.,  on  behalf  of  a  banker  with  a  view  to  his  pur- 
chasing and  operating  the  property. 

The  company  supplies  light  and  power  to  manufactories, 
the  municipality,  miscellaneous  business  establishments,  resi- 
dences, etc.,  under  the  usual  varieties  of  contracts. 

(1)  Describe  fully  the  information  usually  required  for 
a  complete  report. 

(2)  Upon  arriving  on  the  field  you  find  that  the  only 
records  of  the  company's  financial  operations  are  a  bank 
account,  a  meter  readings  book,  copies  of  bills  rendered  to 
consumers  but  no  consumers  ledger,  miscellaneous  paid  and 
unpaid  bills  for  purchases  and  expenses,  and  capital  stock 
books.  The  principal  owner  of  the  company  being  in  the 
supply  and  contracting  business  has  financed  and  constructed 
the  property,  but  his  operations  in  respect  of  same  have  not 
been  spread  on  the  company's  accounts  with  exception  of 
partial  payments  on  account  which  appear  in  the  bank  ac- 
count. Describe  fully  your  procedure  in  procuring  the 
necessary  information  for  your  report. 


102  C.    P.    A.    AUDITING    QUESTIONS 

Question  379 

What  recommendations  would  you  make  for  preventing 
fraud  in  the  following  departments  of  a  bank : 

(1)  Depositors'  accounts? 

(2)  Loans? 

(3)  Revenue  and  expense  accounts? 

Discuss  fully  your  recommendations  and  give  the  rea- 
sons in  support  of  them. 

Question  380 

(a)  Outline  the  revenue  and  expense  accounts  of  a  life 
insurance  company  and  their  proper  treatment  at  annual 
closing  periods. 

(b)  In  the  annual  report  of  a  life  insurance  company  to 
the  Insurance  Department  of  Pennsylvania,  what  is  com- 
prised under  the  captions: 

"Non-Ledger  Assets"? 
"Non-Ledger  Liabilities"? 

Question  381 

You  are  retained  by  the  prospective  purchaser  of  a  busi- 
ness to  make  an  examination  of  the  accounts  covering  a 
period  of  five  years  ended  December  31,  1911. 

The  vendor  has  furnished  the  following  statement  to 
the  prospective  purchaser : 

Gross  profits— yearly  average $315,000.00 

Expenses—  "  "       220,000.00 

Net  profit—  "  "       $95,000.00 


PENNSYLVANIA 

Also  balance  sheet  as  follows : 

Assets: 

Cash $  20.000.00 

Accounts  receivable 250,000.00 

Bills    receivable 50,000.00 

Merchandise   on   hand   as   inven- 
toried   :     500,000.00 

Deferred  charge  for  commissions 

due  salesmen 10,000.00 


103 


Total   $830,000.00 

Liabilities: 

Accounts    payable $120,000.00 

Bills  payable 200,000.00 

Accrued  commissions 10,000.00 

Capital 500,000.00 


Total   $830,000.00 

You  find  from  the  books  that  the  following  items  con- 
stitute the  entries  in  the  Profit  and  Loss  account  for  the 
period : 

Gross  Sales  Selling  Expenses 

1907 $1,000,000.00      1907 $175.00000 

1908 900,00000      1908 125,000.00 

1909 1,250,000.00      1909 160,000.00 

1910 1,000,000.00      1910 115,000.00 

1911 1,000,000.00      1911 115,000.00 


Cost  of  Goods  Sold 


Administrative  and 
General  Expenses 


1907 $650,000.00  1907 $100,000.00 

1908 600,000.00  1908 95,000.00 

1909 925,000.00  1909 80,000.00 

1910 700,000.00  1910 75,000.00 

1911 700,000.00  1911 60,000.00 

Note:  Gradual  reduction  of  administrative  expenses  effected  by 
proprietor  taking  smaller  compensation  for  his  own  services  each 
year. 

I      Losses  incurred  through  failure  to  collect  sundry  debtors* 


I04  C.    P.    A.    AUDITING    QUESTIONS 

$45,000,  and  $65,000,  respectively,  were  charged  to  the  pro- 
prietor's capital  account. 

The  terms  under  which  the  business  is  to  be  sold  are 
based  on  the  value  of  the  net  assets  at  December  31,  1911, 
plus  an  amount  equivalent  to  one-half  of  the  net  profit  for 
the  five  years.  On  this  basis  the  vendors  have  asked  for 
$737,500. 

Write  such  a  report  as  you  would  submit  to  your  client 
(using  the  figures  and  other  information  contained  in  this 
question),  with  the  proper  exhibits  and  comments  upon 
them  as  to  features  which  would  be  of  interest  to  your  client 
as  a  purchaser  of  the  business. 

Question  382 

Describe  methods  for  determining  on  behalf  of  the  in- 
surance companies  the  value  of  a  stock  of  merchandise  on 
hand  at  the  date  of  a  loss  by  fire  in  a  trading  establishment 
under  each  of  the  following  conditions : 

(1)  Where  the  inventories  are  taken  but  once  a  year 

at  the  annual  closing  of  the  books. 

(2)  Where  a  card  or  loose-leaf  record  is  kept  of 

quantities  only  of  each  article. 

(3)  Where  monthly  book  inventories  are  arrived  at 

by  extending  cost  of  sales  in  the  sales  records. 

And  what  special  considerations  would  there  be  to  which 
your  attention  should  be  directed  before  arriving  at  your 
conclusion  ? 

Question  383 

You  are  called  upon  to  close  the  books  of  a  contractor 
in  a  building  operation.  Describe  fully  and  specifically  what 
you  would  take  into  consideration  in  the  closing  of  the  said 
books. 


PENNSYLVANIA  I05 

Question  38J,. 
Write  fully  your  mode  of  procedure  in  making  an  audit 
of  a  municipality.     Give  full  particulars,  with  an  illustra- 
tion, using  your  own  figures. 

Question  385 
A  manufacturing  company,  owning  many  patents  and 
constantly  acquiring  new  ones,  some  by  way  of  outright 
purchase  and  about  an  equal  number  being  taken  out  as  the 
result  of  the  efforts  of  its  own  experimental  department, 
asks  you  to  outline  the  best  method  of  dealing  with  this 
account,  having  in  mind  : 

(a)  The  ascertainment  of  costs  of  manufacture. 

(b)  The  annual  balance  sheet  which  is  submitted  to 

stockholders  and  to  the  general  public. 

Outline  fully  your  views  on  this  subject. 

Question  386 
Messrs.  Brown  &  Wilson  have  applied  to  the  Pennsyl- 
vania National  Bank  for  a  loan  of  $20,000,  and  have  sub- 
mitted the  following  profit  and  loss  account  and  balance 
sheet : 

PROFIT  AND  LOSS  ACCOUNT 
For  Year  Ending  June  30,  1912 

Stock  at  July  1,  1911 $50,000.00 

Purchases  40,000.00 

Wages  and  salaries 8,000.00 

Office   expenses 7,000.00 

Miscellaneous  expenses 15,000.00 

Interest  on  loans 2,700.00 

Bad  debts 800.00 

Profit  37.000.00 


I 


$160,500.00 


I06  C.    P.    A.    AUDITING    QUESTIONS 

Sales  less  returns $80,000.00 

Stock  at  June  30,  1912 75,000.00 

Dividends  on  investments 5,500.00 

$160,500.00 

BALANCE  SHEET,  JUNE  30,  1912 
Assets: 

Book  debts $250,000.00 

Stock  as  per  inventory 75,000.00 

Investments  at  cost 50,000.00 

Good-will   10,000.00 

Lease  of  premises 5,000.00 

Furniture    1,000.00 

Cash  500.00 


$391,500.00 

Liabilities: 

Trade  creditors $344,500.00 

Loans 27,000.00 

Partner's  capital  at  July  1,  1911..       $8,000.00 
Profit  for  year 37,000.00 

$45,000.00 
Less  drawings  during  year 25,000.00        20,000.00 

$391,500.00 


The  bank  has  handed  you  these  accounts  and  asked  for 
your  opinion  as  to  the  advisability  of  making  the  loan  and 
as  to  the  form  in  which  the  accounts  are  presented. 

Question  S87 

What  do  you  understand  by  "Perpetual  Inventory"? 
How  is  it  maintained  and  how  may  it  be  verified?  What 
would  you  require  in  relation  to  such  an  inventory  before 
accepting  it  in  a  balance  sheet  under  your  audit  without 
qualifying  your  certificates? 


I 


PENNSYLVANIA  I07 

Question  388 

A  manufacturer  owes  $100,000  on  his  plant  at  6%  per 
annum,  due  at  the  end  of  five  years  from  date.  He  secures 
an  agreement,  however,  to  pay  the  debt  in  equal  annual  in- 
stalments which  will  include  principal  and  interest.  What 
amount  is  he  required  to  pay  each  year? 

Question  389 

A  company,  whose  accounts  you  are  auditing,  shows 
among  its  assets  an  item  of  $100,000  for  a  lease  upon  a 
warehouse.  The  lease  was  acquired  ten  years  ago  and  has 
still  forty  years  to  run.  The  book  value  consists  of  $50,000 
paid  for  the  lease  at  the  time  it  was  acquired  and  an  addi- 
tional $50,000  expended  upon  rebuilding  property  five  years 
ago.  Nothing  has  heretofore  been  written  off  the  asset  ac- 
count and  its  present  realizable  value  is  conservatively  esti- 
mated at  $150,000. 

In  preparing  the  accounts  for  the  present  year  the  fol- 
lowing methods  have  been  proposed  by  various  officials,  and 
you  are  asked  to  decide  which  one  should  be  adopted,  giving 
your  reasons  therefor,  as  well  as  the  reasons  upon  which 
you  base  your  decision  in  rejecting  the  others : 

(1)  The  property  being  worth  more  than  the  book 

value,  nothing  should  be  written  off. 

(2)  Such  profits  as  it  is  not  desired  to  distribute  in 

dividends  may  occasionally  be  written  off  in 
reduction  of  the  account. 

(3)  An  equal  one-fortieth  part  should  be  written  off 

annually. 

(4)  A  sinking  fund  should  be  created  that  would 
produce  $100,000  upon  the  expiry  of  the 
lease. 


Io8  C.    P.    A.    AUDITING    QUESTIONS 

Question  390 

The  Atlas  Trading  Company  leases  a  store  for  a  period 
of  ten  years  at  a  total  rental  of  $450,000,  to  be  paid  in 
monthly  instalments  of  $3,750  each.  Before  the  lease  goes 
into  effect,  however,  an  arrangement  is  entered  into  whereby 
the  company  agrees  to  pay  $25,000  on  the  date  upon  which 
the  lease  takes  effect.  For  this  payment  they  are  to  receive 
a  credit  of  $30,000,  applying  on  the  total  rental  of  $450,000, 
the  difference  between  the  amount  of  the  credit  and  the 
amount  actually  paid  being  intended  to  represent  compound 
interest  on  the  advance. 

Under  the  revised  lease  the  company  agrees  to  make 
monthly  payments  for  the  original  period  of  ten  years  at 
the  rate  of  $3,500  per  month. 

State  concisely  how  you  would  treat  upon  the  books  of 
the  company  the  transactions  arising  under  this  lease. 

Question  891 

The  Scranton  Land  Company  is  incorporated  and  pur- 
chases fifty  acres  of  land,  which  it  subdivides  into  blocks 
and  lots.  It  then  negotiates  the  sale  of  first  mortgage  bonds 
secured  upon  the  whole  property  in  an  amount  equal  to  one- 
third  of  the  purchase  price  of  the  property.  From  the  pro- 
ceeds of  the  bonds  sold,  the  company  proposes  to  make 
streets,  sewers,  sidewalks,  and  carry  out  other  necessary 
improvements  before  placing  the  lots  upon  the  market  for 
sale. 

Sales  of  lots  are  to  be  made  upon  contracts  calling  for 
payment  as  at  date  of  execution,  amounting  to  10%  of  the 
sale  price  of  each  lot  sold,  the  balance  to  be  paid  in  monthly 
instalments  of  10%,  each  title  to  pass  to  the  purchaser  as 
soon  as  he  has  paid  one-half. 

Outline  a  system  of  accounts  to  show  the  original  in- 


PENNSYLVANIA 


109 


vestment,  bonded  indebtedness  and  the  application  of  the 
proceeds  of  the  bonds,  the  contracts  for  sale  of  lots,  the 
liquidation  of  these  contracts,  and  having  particular  refer- 
ence to  the  ascertainment  and  distribution  of  profits. 

Question  392 

Prepare  a  sample  statement  of  an  administrator's  final 
account  for  presentation  in  a  probate  court. 

Question  393 

The  duly  appraised  inventory  dated  January  1,  1910,  of 
the  estate  of  John  D.  Hamilton,  deceased,  contained  the 
following  item : 

50  Shares  Plumbers  National  Bank 

$100  each  par  value  at  550 .  .$27,500.00 

The  bank  for  a  period  of  years  has  consistently  paid 
semiannual  dividends  of  12%. 

On  February  1,  1910,  the  bank  declared  its  usual  12% 
semiannual  dividend;  wishing  to  increase  its  capitalization 
it  paid  the  dividend  in  cash,  and  gave  its  stockholders  the 
option  of  buying  new  stock  to  the  amount  of  the  dividend, 
at  par. 

The  executors  indorsed  and  returned  the  dividend  check, 
receiving  in  exchange  the  six  shares  of  new  stock. 

Thereafter  they  sold  stock  as  follows : 

March  1,  2  shares,  at $500  each 

March  3,  2  shares,  at 495  each 

March  15,  4  shares,  at 480  each 

The  income  of  the  estate  is  payable  to  two  sisters  of  the 
decedent,  Helen  H.  Winter  and  Sarah  H.  Samuels,  during 
their  lives,  and  a  brother,  William  B.  Hamilton,  is  the 
residuary  legatee. 


no  C.    p.    A.    AUDITING    QUESTIONS 

In  respect  of  the  above  transactions  show  the  effect 
thereof  upon  the  interests  of  each  of  the  three  beneficiaries. 
Give  your  calculations  in  full. 

Question  39 Jf 

What  are  the  present  requirements  of  the  Interstate 
Commerce  Commission  relative  to  the  treatment  of  depre- 
ciation in  the  accounts  and  reports  of  railroad  companies? 

Question  395 

You  have  audited  the  accounts  of  the  Standard  Man- 
ufacturing Company  for  the  year  ending  June  30,  1913, 
and  are  asked  to  give  a  certificate  covering  the  balance  sheet 
and  profit  and  loss  account  for  the  year,  this  certificate  to 
be  published  by  the  company  in  its  printed  annual  report. 
Draft  the  form  of  certificate  you  would  give  in  each  of  the 
following  circumstances:  (a)  if  the  company  has  given  ef- 
fect in  its  accounts  to  all  the  adjustments  you  have  deemed 
necessary;  (b)  if  the  company  has  provided  for  everything 
except  depreciation  upon  its  factory  buildings  and  equip- 
ment; and  (c)  if  the  company  has  not  agreed  to  the  follow^ 
ing  adjustments  which  you  have  urged:  (1)  additional  re- 
serve for  loss  on  trade  debtors,  $20,0,00;  (2)  liabilities  for 
damage  claims  estimated  at  $12,000;  and  (3)  oyervaltiation 
of  the  inventory,  $18,000.  In  considering  the  relative  effect 
and  importance  of  these  adjustments  it  rriay  be  assumed  that 
the  profits  before  adjustment  have  been  for^  the  year  under 
audit '$100,000. 

The  purpose  of  this  question  is  to  disclose  the  candidate's 
knowledge  of  the  principles  governing  an  accountant  in  the 
issuance  of  audit  certificates,  and  in  considering  replies  due 
weight  will  be  given  to  form  and  phraseology. 


PENNSYLVANIA 


III 


Question  396 

Prepare  a  comprehensive  report  together  with  rough 
sketches  of  the  necessary  forms  recommending  a  system  for 
the  collateral  loan  department  of  a  national  bank  having 
loans  secured  by  stocks  and  bonds  aggregating  $10,000,000, 
the  majority  of  which  are  loans  to  brokers.  Of  the  total 
loans  $4,000,000  are  time  loans  and  the  balance  demand 
loans,  and  in  number  they  aggregate  about  five  hundred. 

The  bank  maintains  an  audit  department,  and  provision 
should  be  made  outlining  a  system  for  continuous  daily 
audits  of  the  loan  department. 

It  is  understood  that  the  bank  will  not  adopt  any  system 
which  will  result  in  a  delay  in  effecting  the  daily  transac- 
tions or  cause  annoyance  to  its  customers. 

Question  397 

You  are  engaged  to  audit  the  accounts  of  the  X  Com- 
pany, manufacturers  of  hosiery — this  company  operating 
four  mills,  the  product  of  which  consists  of  numerous  grades 
and  styles.  The  company  is  without  a  cost  system  but 
endeavors  to  ascertain  its  costs  by  taking  the  estimated 
quantities  of  cotton  or  silk  to  which  is  added  a  labor  cost 
determined  by  tests,  and  to  the  total  thus  obtained  an  arbi- 
trary percentage  is  added  to  cover  general  expenses,  etc. 

The  general  books  consist  of  a  ledger,  cash  book,  jour- 
nal, and  voucher  record.  Invoices  are  entered  after  approval 
and  have  stamped  thereon  the  date  of  approval.  The  re- 
ceiving record  consists  of  loose  memoranda  in  pencil  con- 
taining the  name  of  the  party  from  whom  materials  were 
received  and  the  number  of  cases,  but  no  further  details. 

Give  full  particulars  as  to  the  steps  you  would  take  to 
verify: 

(a)  The  inventory 

(b)  The  liabilities 


112  C.    P.    A.    AUDITING    QUESTIONS 

Question  S98 

A  real  estate  company  for  the  purpose  of  obtaining  cash 
to  be  used  in  developing  a  large  tract  of  land  assigns  the 
mortgages,  taken  in  part  payment  of  land  sold,  to  a  trust 
company  as  trustee,  whereupon  the  trust  company  delivers 
bonds  to  the  real  estate  company,  which  are  then  sold  to  the 
general  public. 

You  are  called  in  to  examine  the  books  of  the  real  es- 
tate company  and  discover  an  apparent  sale  of  land  has  been 
made  to  a  syndicate,  the  members  of  which  are  directors  of 
the  company.  Payment  for  the  land  sold  to  the  syndicate 
was  made  by  means  of  notes  and  mortgages  of  the  syndi- 
cate. The  mortgages  were  delivered  to  the  trustee,  bonds 
received  and  sold  for  cash.  The  minute  books  contain  an 
agreement  with  the  syndicate  members  to  repurchase  the 
land  from  the  syndicate  at  the  price  paid  by  the  syndicate 
therefor.  How  would  you  treat  this  transaction  in  pre- 
paring the  balance  sheet  of  the  real  estate  company,  and 
what  comments,  if  any,  would  you  make  in  your  report? 

Question  399 

Describe  and  illustrate  by  condensed  forms  the  books, 
etc.,  required  to  record  to  the  best  advantage  the  operations 
of: 

(a)  The  loan  department  of  a  large  national  bank. 

(b)  The  trust  department  of  a  large  trust  company. 

Discuss  the  best  method  for  disbursing  salaries  in  a  bank 
having  a  staff  of  one  hundred  people,  and  what  records 
thereof  would  you  suggest  be  kept  ? 

How  would  you  vouch  charges  to  board  fees  in  a  bank 
audit  ? 

How  should  collection  charges  to  customers  or  deduc- 
tions for  same  be  handled  and  recorded  in  order  that  they 


PENNSYLVANIA 


113 


may  be  properly  accounted  for  and  susceptible  of  easy  audit  ? 
State  all  the  reasons  for  an  auditor  confirming  collateral 
loans  by  correspondence  with  the  borrowers. 

Question  JfOO 

Discuss  fully  the  items  that  would  appear  in  the  balance 
sheet  of  a  stock  and  bond  brokerage  firm  at  the  close  of 
the  fiscal  period. 

In  closing  the  books  at  the  end  of  the  period  what  items 
should  receive  special  consideration  and  adjustment  in  or- 
der that  the  accounts  may  reflect  the  true  financial  condi- 
tion and  the  correct  results  of  operation? 

Question  Jf.01 

Describe  in  sufficient  detail  and  in  such  manner  as  to 
be  readily  understood  by  your  client,  the  books  and  records 
you  would  recommend  for  the  proper  handling  of  cash 
receipts  and  cash  disbursements  in  a  large  importing  and 
jobbing  concern  having  several  thousand  customers  in  the 
city  and  throughout  the  Eastern  states.  Your  answer 
should  comprise  a  description  of  the  books,  etc.,  with  rough 
condensed  outline  of  forms,  and  also  prescribe  how  the 
funds  should  be  handled  and  safeguarded;  and  should  dis- 
close the  probable  conditions  and  the  problems  that  would 
have  to  be  solved. 

Question  J^02 

Describe  your  method  of  verifying  a  pay-roll  of  a  man- 
ufacturing concern  employing  2,500  men,  some  of  whom 
are  piece-workers  and  the  balance  on  day  rates. 

Question  403 
A  coal  mining  company  owning  the  mines  it  operates, 


114 


C    P.    A.    AUDITING    QUESTIONS 


having  $500,000  5%  bonds  outstanding,  redeemable  by  an 
annual  sinking  fund  to  be  derived  from  profits,  and  with 
a  floating  debt  of  $100,000  represented  by  notes  payable, 
makes  the  following  statement  of  its  operations  to  a  banker 
who  asks  you  to  examine  and  criticize  it,  to  wit : 

PROFIT    AND    LOSS    ACCOUNT 
For  Year  to  30th  June,  1913. 

Sales  of  coal,  250,000  tons $300,000.00 

Mining  labor $215,000.00 

Supplies,  expenses  and  repairs. . . .         30,000.00      245,000.00 

$55,000.00 

Rents  and  miscellaneous  income 12,000.00 

Steel  car  earnings,  net  of  repairs 20,000.00 

$87,000.00 
Selling  expenses,  including  agents' 

commissions    $10,000.00 

General  office  expenses 4,000.00 

Legal  500.00 

Taxes 2,500.00 

Interest  and  discount 35,000.00      $52,000.00 

Net  profits $35,000.00 


What  comments  or  criticisms  would  you  submit? 

Question  JfOJf. 

A  department  store  having  twenty-five  departments  re- 
tains an  accountant  to  revise  their  old  system,  and  to  thor- 
oughly reorganize  their  books  so  that  the  firm  could,  by 
looking  at  one  book,  know  at  all  times  the  exact  standing 
of  each  department.  Explain  fully  your  idea  as  to  plan 
and  contents  of  such  a  book ;  also  give  a  full  explanation  as 
to  the  accounting  system  you  would  provide  for  the  C.  O.  D. 
business  of  a  department  store. 


PENNSYLVANIA  II5 

Question  Jf05 

A  contracting  firm  have  agreed  to  dissolve  partnership, 
A  continuing  the  business.  There  is  no  provision  in  the 
partnership  papers  governing  a  dissokition.  A  had  2/3 
interest  and  B  1/3  interest.  They  have  quite  a  number  of 
unfinished  contracts.  In  arriving  at  a  settlement  what  ac- 
counts would  you  find  it  necessary  to  deal  with  and  how 
would  you  treat  each  one?  Explain  fully  and,  if  necessary, 
supply  your  own  figures. 

Question  J^06 

Describe  fully  an  audit  of  an  automobile  factory,  espe- 
cially the  inventory  and  agents'  accounts. 

Question  1^.01 

(a)  In  auditing  the  accounts  of  a  steam  railroad  com- 
pany what  procedure  would  you  adopt  to  verify  the  equip- 
ment account,  and  also  the  specific  liabilities  for  equipment? 

(b)  State  the  requirements  of  the  Interstate  Commerce 
Commission  relative  to  depreciation  in  railroad  accounts. 

Question  k08 

Devise  a  timekeeping  system  for  a  concern  employing 
mechanics,  helper  in  machine  shop,  moulders,  pattern- 
makers, helpers  in  pattern  shop,  yard  laborers,  etc.,  and 
give  your  reasons  in  full. 

I  Question  409 

"A"  and  "B"  are  partners,  carrying  on  a  business  in 
Winnipeg.  On  January  1,  1910,  after  adding  profits  for 
the  past  half  year,  "A's"  capital  amounted  to  $150,000  and 
I 


Il6  C    p.    A.    AUDITING    QUESTIONS 

"B's"  to  $100,000.  On  that  date  they  take  into  partner- 
ship *'C/'  upon  the  following  terms,  viz. :  he  is  to  bring 
in  capital  amounting  to  $25,000,  and  each  partner  is  to  be 
credited  with  interest  on  his  capital  at  6%  per  annum.  All 
profits  in  excess  of  $25,000  are  to  be  shared  equally  by  the 
three  partners.  Accounts  are  to  be  prepared  and  profits 
and  interest  credited  half-yearly.  *'C"  is  to  be  credited 
with  a  salary  of  $5,000  per  annum.  On  June  30,  1910, 
the  profits  divisible  after  debiting  *'C's"  salary,  which  he 
has  drawn,  but  before  charging  interest  on  partners'  capi- 
tal, amounted  to  $75,000.  The  partners'  withdrawals 
which  are  not  chargeable  with  interest  were :  *'A,"  $12,500 ; 
"B,"  $10,000;  and  "C,"  $3,750.  Draw  up  partners'  sepa- 
rate accounts  as  they  should  stand  on  July  1,  1910. 

Assume  that  instead  of  a  profit,  a  loss  of  $75,000  had 
occurred.  How  would  you  have  treated  it  in  the  accounts 
in  the  absence  of  any  direct  provision  in  the  partnership 
agreement  relative  to  losses? 


MARYLAND 


Question  J/^IO 

A  chemical  manufacturing  company  which  had  paid 
$90,000  for  six  patents  of  equal  value,  sold  one  of  these 
patents  during  the  first  year  of  its  existence  and  received 
in  payment  5,000  fully  paid  shares  (par  $10)  in  a  sub- 
sidiary company  formed  for  the  purpose  of  working  the 
patent. 

In  the  second  year  the  chemical  company  sold  the  5,000 
shares  of  stock  to  the  subsidiary  company  for  $25,000 
cash. 

How  would  you,  as  auditor,  expect  the  5,000  shares, 
or  proceeds  of  them,  to  be  treated  in  the  accounts  of  the 
chemical  manufacturing  company  at  the  end  of  the  first 
and  second  years,  respectively? 


117 


WASHINGTON 


Question  411 

State  briefly  your  duties  as  an  auditor  in  reference  to 
the  following  matters : 

(a)  Machinery  the  value  of  which  has  not  been  regu- 

larly depreciated 

(b)  Loans  from  bankers 

(c)  Doubtful  debts 

(d)  Good-will 

Question  Jfl2 

How  would  you,  as  auditor  of  an  incorporated  com- 
pany, satisfy  yourself  of  the  existence  of  shares  or  bonds 
given  as  security  for  loans  to  the  company  ? 

Question  JflS 

A  firm  of  export  merchants  desires  a  thorough  inves- 
tigation of  the  past  year's  transactions,  having  reason  to 
suspect  fraud.  State  concisely  upon  what  lines  you  would 
proceed  to  satisfy  yourself  that: 

(a)  Goods  had  been  taken  out  of  the  store  on  bond 

in  the  way  shown  by  the  books. 

(b)  They  had  been   shipped  to  account  of  proper 

consignee. 

(c)  That  no  goods  had  been  removed  without  being 

charged. 

(d)  That  no  fictitious  entries  had  been  made  in  the 

books. 

ii8 


WASHINGTON  II9 

Question  Jf-lJ^ 

The  following  is  the  trial  balance  of  the  Blank  Manu- 
facturing Company  as  taken  from  its  books  at  December 
31,  1912,  the  accounts  being  arranged  in  the  alphabetical 
order  shown  by  reason  of  their  having  been  taken  from 
the  alphabetically  indexed  loose-leaf  ledger  of  the  company : 

TRIAL    BALANCE 

Dr.  Cr. 

Accounts  payable $190,500.00 

Accounts  receivable $369,926.00 

Accrued  salaries  and  wages 1,608.00 

Advertising   12,96L00 

Bad  debts  written  off 3,107.00 

Bills   payable 58,000.00 

Bills  receivable 14,000.00 

Bond  discount  (to  be  written  off  during 

life  of  bonds) 12,667.00 

Bond  interest  payable 4,166.50 

Capital    stock — common 750,000.00 

Capital   stock— preferred 320,000.00 

Cash  in  bank  and  on  hand 58,828.50 

Credit  department  expenses 1,973.50 

Depreciation  of  buildings 545.00 

Depreciation  of  machinery  and  equip- 
ment    2,232.00 

Depreciation  of  office  equipment 700.00 

Depreciation  of  workmen's  cottages...  1,800.00 

Directors'  fees 600.00 

Discount  on  bonds  charged  off 506.50 

Discount  on  purchases 7,608.50 

Discount  on  sales *. . .  8,937.00 

Federal  corporation  tax 1,538.00 

First  mortgage  5%  30-year  gold  bonds 

(dated  May  1,  1908) 500,000.00 

Freight  and  cartage  inward 4,381.00 

Freight  and  cartage  outward 3,431.00 

General  office  expenses 1,771.50 

Good-will  250,000.00 

Insurance   3,115.00 

Insurance  premiums  unexpired 1,81  l.(X) 


120  C.    P.    A.    AUDITING    QUESTIONS 

Trial  Balance  (Continued) 

Interest  on  bills  payable 10,075.00 

Interest  on  bonds 29,166.50 

Income  from  investments 30,752.50 

Inventory  raw  materials,  12/31/11  (cost)  122,686.00 
Inventory  estimated  goods  in  process, 

12/31/11    (cost) 43,211.00 

Inventory  manufactured  goods,  12/31/11 

(cost)  '. . .  222,930.00 

Inventory  raw  materials,  12/31/12  (cost)  115,812.00 
Inventory  manufactured  goods,  12/31/12 

(cost)    256,609.00 

Inventory  estimated  goods  in  process, 

12/31/12    (cost) 39,220.00 

Inventory    fuel,    factory    supplies,    etc., 

12/31/12   (cost) 20,031.50 

Inventory  raw  materials,  12/31/12  (cost)  115,812.00 

Inventory  estimated  goods  in  process, 

12/31/12    (cost) 39,220.00 

Inventory  manufactured  goods,  12/31/12 

(cost)  256,609.00 

Maintenance  of  buildings 2,273.00 

Maintenance   of  machinery  and  equip- 
ment    3,321.50 

Maintenance  of  workmen's  cottages...  1,760.00 

Manufacturing  power,  heat  and  light. . .  7,461.00 

Miscellaneous  factory  expenses 2,240.00 

Miscellaneous  selling  expenses 2,881.00 

Non-productive  labor 17,931.00 

Office  equipment 14,000.00 

Office  salaries 4,875.00 

Officers'  salaries  and  expenses 12,092.00 

Organization    expenses 8,940.00 

Organization  expenses  written  off 928.00 

Patent  rights ; 28,637.00 

Patent  rights  written  off 1,981.00 

Patterns  and  drawings  (appraised  value)  19,000.00 

Patterns  and  drawings  written  off 321.50 

Plant  site  (cost) 120,000.00 

Plant  buildings  (cost) 218,000.00 

Plant  machinery  and  equipment  (cost).  316,817.00 

Productive  labor 210,642.50 

Purchasing  department  expenses 2,836.00 

Raw  materials  purchased 468,212.00 


.    WASHINGTON  I2i 

Trial  Balance  (Continued) 

Rent  of  workmen's  cottages 7,300.00 

Reserve  for  depreciation  of  buildings...  21,635.00 

Reserve  for  depreciation  of  machinery 

and  equipment 57,351.00 

Reserve  for  depreciation  of  office  equip- 
ment    3,100.00 

Reserve  for  depreciation  of  workmen's 

cottages   18,140.00 

Reserve  for  doubtful  accounts 2,608.00 

Returns  and  allowances  on  purchases..  1,931.00 

Returns  and  allowances  on  sales 2,377.00 

Sales  of  manufactured  products 874,160.50 

Sales  of  waste  materials 1,064.50 

Sales  agents'  commissions 4,922.00 

Salesmen's   expenses 3,632.50 

Salesmen's   salaries 9,250.00 

Sinking  fund  investments 26,077.00 

Stock  of  subsidiary  and  allied  corpora- 
tions  (cost) 343,500.00 

Surplus 272,237.50 

Taxes  on  plant  and  equipment 10,181.00 

Taxes  payable 3,857.00 

Workmen's  cottages  (cost) 58,000.00 

$3,537,661.00    $3,537,661.00 

You  have  audited  the  books  of  the  company  for  the 
year  1912,  and  during  your  examination  the  following 
matters  have  come  to  your  attention : 

(1)  You  have  ascertained  from  the  minute  book  of  the 
company  that  the  following  semiannual  dividends  were  de- 
clared on  December  31,  1912,  which,  however,  were  not 
payable  until  January  15,  1913: 

3%  on  preferred  stock ..$  9,600.00 

3%  on  common  stock 22,500.00 

A  similar  dividend  was  declared  on  June  30,  1912,  and 
paid  on  July  15,  1912. 

(2)  You  have  found  that  there  were  outstanding  lia- 


122  C.    P.    A.    AUDITING    QUESTIONS 

bilities  at  December  31,  1911,  which  had  not  been  taken 
into  account  in  closing  the  books  at  that  date,  such  items 
being  paid  in  the  year  1912,  viz. : 

Productive  labor $1,752.50 

Non-productive  labor 614.00 

Manufacturing  power,  heat 

and  light 214.00 

General  office  expenses 115.00 

Office  salaries 110.00 

Taxes  for  year  1911 6,324.00 

Interest  on  bonds 4,166.50 

Interest  on  bills  payable 975.00     $14,271.00 


(3)  You  have  found  that  the  following  expense  items 
paid  in  advance  at  December  31,  1911,  were  not  taken  into 
account  in  closing  the  books  at  that  date,  viz. : 

Insurance  premiums  unexpired $1,609.00 

Interest  prepaid  on  bills  payable. . . .     2,438.00 


$4,047.00 


(4)  You  have  discovered  errors  in  the  extensions  and 
prices  of  the  inventories  at  December  31,  1911,  as  follows: 

Raw  materials — To  be  increased ....  $1,921.00 
Goods  in  progress — To  be  decreased . .  595.00 
Finished  goods — To  be  decreased.  . .    1,054.00 

(5)  Having  examined  the  accounts  receivable  ledgers 
carefully,  you  are  of  the  opinion  that  the  reserve  for  bad  and 
doubtful  accounts  of  $2,608  is  insufficient,  and  having  dis- 
cussed the  matter  with  the  management  of  the  company  it 
is  desired  to  increase  the  reserve  to  $5,000,  $1,500  of  the 
increase  to  be  considered  as  applying  prior  to  December 
31,  1911,  and  the  balance  to  the  year  1912. 


WASHINGTON 


123 


(6)  After  an  examination  of  the  plant  and  equipment  ac- 
counts, you  are  satisfied  that  the  additions  charged  during 
the  year  are  proper  capital  expenditures,  the  amounts  of 
these  additions  being  as  follows : 

Plant  buildings   $  9,000.00 

Plant  machinery  and  equipment. .  . .    11,817.00 
Office  equipment 1,500.00 

In  your  opinion  the  depreciation  provisions  during  the 
year  have  been  insufficient,  although  you  are  of  the  opinion 
that  the  provisions  to  December  31,  1911,  were  adequate. 
You  should  increase  the  depreciation  charges  for  the  year 
to  the  following  rates : 

2%%  on  the  ledger  balance  01  Plant  Buildings  ac- 
count at  December  31,  1911. 

Y%%  on  the  ledger  balance  of  the  Plant  Machinery 
and  Equipment  account  at  December  31,  1911. 

10%  on  the  ledger  balance  of  Office  Equipment  ac- 
count at  December  31,  1911. 

(7)  Errors  in  the  prices  and  extensions  of  the  inven- 
tories at  December  31,  1912,  have  been  discovered,  and 
changes  should  be  made  as  follows : 

Manufactured  goods — To  be  in- 
creased  $2,712.00 

Goods  in  progress — To  be  decreased . .       375.00 
Raw  materials — To  be  decreased. .  . .   9,225.00 

(8)  No  provision  has  been  made  for  the  interest  accrued 
at  December  31,  1912,  on  bills  payable,  the  same  amounting 
to  $2,925.50. 

(9)  You  have  learned  that  bills  receivable  formerly  held 
by  the  company,  not  yet  due,  amounting  to  $10,000,  had 
been  discounted  at  December  31,  1912.  : 


124  ^-    ^'    ^-    AUDITING    QUESTIONS 

(10)  While  no  change  is  to  be  made  in  the  proportions 
of  organization  expenses  and  patent  rights  written  off 
during  the  year  and  the  Good-Will  account  is  to  be  left  at 
the  trial  balance  figure,  an  adjustment  in  connection  with 
the  Bond  Discount  account  is  considered  necessary.  While 
the  sum  of  «$50G.50  written  off  during  the  year  is  the  proper 
yearly  proportion  necessary  to  extinguish  the  bond  discount 
during  the  life  of  the  bonds,  clerical  errors  have  been  made 
in  prior  years,  and  the  proportion  of  bond  discount  shown 
in  the  trial  balance,  viz. :  $12,667,  is  therefore  incorrect  and 
should  be  changed  to  the  proper  amount. 

(11)  The  amount  shown  for  taxes  payable  at  December 
31,  1912,  is  but  one-half  of  the  amount  of  taxes  assessed 
for  the  year  1912. 

(12)  All  of  the  authorized  issue  of  common  stock  was 
outstanding,  but  while  only  $320,000  of  the  6%  cumulative 
preferred  stock  was  outstanding  at  December  31,  1912, 
you  have  ascertained  that  the  authorized  issue  of  the  same 
was  $750,000. 

Make  the  necessary  adjusting  journal  entries  to  properly 
state  the  financial  position  of  the  company  at  December  31, 
1912,  and  the  profit  and  loss  account  for  the  year. 

Prepare  summary  showing  cost  of  goods  sold  to  be 
carried  to  the  profit  and  loss  account  as  a  single  item. 

Prepare  profit  and  loss  account,  grouping  the  expenses 
other  than  those  applying  to  the  cost  of  goods  sold,  under 
selling  expenses,  general  and  administrative  expenses,  etc. 

Prepare  balance  sheet. 

Show  percentage  of  gross  profit  on  net  sales  and  per- 
centage of  gross  profit  on  cost  of  goods  sold. 

Note:  In  submitting  your  answers  to  this  problem  use  all  of 
the  separate  accounts  shown  and  do  not  combine  items  of  a  similar 
nature  in  preparing  either  the  balance  sheet  or  the  profit  and  loss 
statements. 


WASHINGTON  I25 

Question  Jflo 

The  directors  of  a  mining  corporation,  of  which  you 
are  auditor,  decline  to  provide  what  you  consider  an  ade- 
quate depreciation  of  wasting  assets.  What  attitude  would 
you  assume  in  these  circumstances? 

Question  Jfl6 

Discuss  generally  the  duty  of  an  auditor  in  relation  to 
the  question  of  depreciation,  and  illustrate  your  argument 
by  dealing  with  such  items  as: 

Lands  and  buildings 

Lease  of  coal  mines 

Good-will 

Outside  investments  of  fluctuating  value 

Question  417 

Do  you  consider  it  necessary,  and,  if  so,  why,  for  an 
auditor  of  a  corporation  to  peruse  the  minutes  of  directors' 
and  shareholders'  meetings? 

Question  Jf.18 

A  lumber  mill,  owing  to  slack  business,  stops  manufac- 
turing, but  not  selling.  During  the  period  of  shut  down 
the  mill  is  almost  entirely  rebuilt;  the  old  machinery  thor- 
oughly overhauled;  new  and  additional  machinery  added, 
and  an  entire  and  more  efficient  arrangement  of  the  entire 
plant  had.  During  the  previous  six  years  the  book  value 
of  the  plant  had  been  reduced  by  the  following  deprecia- 
tions : 

On  buildings,  10%  per  annum  on  original  cost. 
On  m.achinery,  6fc  per  annum  on  original  cost. 


126  C.    p.    A.    AUDITING    QUESTIONS 

You  as  auditor  for  the  company  are  asked  to  advise  to 
what  accounts  the  cost  of  rebuilding,  of  overhauling,  and  of 
the  additions  are  to  be  charged. 

Give  your  answer,  stating  fully  your  reasons. 

Also  advise  as  to  when,  in  your  opinion,  depreciation 
should  be  taken  into  consideration  on  the  rearranged  plant 
if  active  operations  are  not  resumed  for  six  months  after 
the  completion  of  the  changes. 

Question  ^19 

(a)  In  auditing  the  accounts  of  a  steamship  company 
operating  freight  and  passenger  steamers  and  doing  a  coast- 
wise as  well  as  a  foreign  trade,  how  would  you  verify : 

(1)  The  passenger  earnings? 

(2)  The  freight  earnings? 

(3)  Other  earnings? 

(b)  State  what  earnings  other  than  from  passengers 
and  freight  a  steamship  company  may  have. 

(c)  A  steamship  company  operating  steamers  upon  in- 
land rivers  where  the  fuel  used  is  cord  wood,  considers  the 
fuel  cost  per  trip  as  shown  by  the  trip  statements  too  high 
and  they  suspect  fraud.  You  as  auditor  are  asked  to  make 
an  investigation.     State  what  your  procedure  would  be. 

Question  1^20 

The  Gendron  Corporation  operate  coal  mines,  saw- 
mills, a  logging  railroad  and  have  their  own  timber  hold- 
ings. 

All  of  the  accounts  are  kept  in  one  large  ledger,  with 
the  usual  books  of  original  entry,  at  the  general  office  in 
New  York.  They  engage  the  services  of  yourself  to  audit 
the  books  for  the  year  ending  June  30,  1909.  The  follow- 
ing is  a  copy  of  the  trial  balance. 


127 


WASHINGTON 

GENDRON  CORPORATION 

Trial  Balance— June  30,  1909. 

Plant  equipment— Mine  A $31,955.26 

New  plant— Mine  7 62,173.27 

Stumpage,  cut  for  sawmill 7,524.26 

Capital  stock $581,500.00 

Betterment  to  Mines  3  and  4 2,783.42 

Local  purchase  logs 51,66 

Sawmill  repairs 1,360.31 

Cash   7,436.05 

Development— Mine  No.  1 3,822.37 

Timber  and  land 240,305.26 

Planing  mill  repairs 341.43 

Accounts  receivable 76,421.91 

Mine  engineering  tools — Mine  1 225.00 

Petty  cash — mines 750.00 

Lumber — outside  purchases 79.20 

Lighterage  on  lumber 57.95 

Mine  administrative  salaries  and  supplies  2,195.22 

Petty  expenses  at  mines 1,649.28 

Tenant  houses  at  mines 2,117.22 

Lumber,  logs,  etc.,  on  hand 50,853.60 

Sawmill  pay-roll 4,141.41 

Planing  mill  pay-roll 2,421.95 

Commissary  purchases — lumber 8,642.58 

Feed  and  labor — mine  stables 925.75 

Electrical  repairs  at  mine 467.97 

Commissary    pay-roll — lumber 726.65 

Logging  pay-roll 200.00 

Unexpired  insurance  premiums 3,918.49 

Mine  cars 6,139.78 

Lath  mill  pay-roll 249.65 

Electrical  plant — mine 3,190.00 

Interest    on    loans    covering   mine    plant 

construction  7,226.73 

Mines  warehouse — stock  on  hand 1,743.22 

Lath  mill  repairs 7.27 

Railroad  equipment 74,710.38 

Railroad  pay-roll  and  expenses 2,241.86 

Camp  equipment 22,192.34 

Camp  pay-roll 1.549.75 

Yard  and  shed  repairs 112.10 

Logging  railroad  track 47,769.13 


128  C.    p.    A.    AUDITING    QUESTIONS 

Trial  Balance  (Continued) 

Office   salaries — lumber 1,021.67 

Unclaimed  miners'  wages 246. 1 7 

Coal,  sales 57,280.78 

Building  material  on  hand  at  mine 810.75 

Interest  on  funds  to  develop  Mine  No.  1  240.00 

Mine  office  furniture  and  fixtures 1,459.17 

Mine  officer's  house  furnishings. ........  513.29 

Mine  railroad  track  and  switches 3,916.82 

Telephone  line — mill  to  woods 436.56 

Freight  on  logs  to  sawmill 1,614.40 

Camp  boarding  house  equipment 1,500.00 

Interest  and  discount — lumber 422.09 

Mine  store  expense  and  labor 2,472.83 

Mine  store  freight 472.98 

Sawmill  machine  shop 2,328.53 

Outside   investment 1,949.90 

Advanced  to  new  coal  corporation 1,373.27 

Mill  plant 324,982.92 

Lumber  sales 28,033.11 

Lath  and  shingle  sales 2,392.45 

Insurance — mill  85.30 

Operation  Chicago  office — lumber 1,000.00 

Allowances    and     discounts — coal     ship- 
ments   637.40 

Repairs  and  expenses — mine  stables 124.22 

Mine  office — salaries  and  supplies 1,562.23 

Mine   eng. — salaries   and   supplies — Mine 

No.  1 625.00 

Traveling  expenses — mine  manager 221.67 

Interest — current  loans  at  mine 125.00 

General  office  expenses — lumber 853.80 

Discount  on  lumber  sold 1,931.60 

Bills  payable 172,667.50 

Accounts  payable — audited 24,287.03 

Bonds  on  timber  lands 35,000.00 

Taxes — mines  178.53 

Insurance — mines    1,271.11 

Legal  expense — mines 785.00 

Royalty  on  coal  mined 4,989.77 

Mining  labor 29,871.23 

Surplus  195,764.45 

Sales  of  wood 186.00 


WASHINGTON 


129 


Trial  Balance  (Continued) 

Rent  of  dwellings  and  miscellaneous  in- 
come— lumber    278.00 

Yard    filling    and    tunnel    extensions    at 

mines    2,743.22 

Delivery  of  coal  to  tipple 3,571.28 

Maintenance  of  way — mines 710.11 

Maintenance  of  air — mines 739.10 

Props,  ties,  and  caps 497.17 

Mine   foreman — salary 800.00 

Maintenance  of  mine  cars 209.38 

Mine  machinists'  and  engineers'  wages..  1,378.78 

Smithing — mines   672.10 

Fuel — mine  power  house 297.51 

Removal  of  slate 551.98 

Deadwork  at  mines 47.21 

Electrical  supplies  at  mines 2,488.55 

Insurance    during    construction    of   mine 

plant   937.97 

Norfolk  &  Western  Ry.  claims  at  mines  71.59 

Repairs  to  miners'  houses 171.19 

Legal    expense — in    re    right    of   way   to 

mines  342.68 

Live  stock  at  mine 3,850.00 

Taxes     during     construction     of     mine 

plant   313.71 

Mine  commissary  purchases 8,427.60 

Rental  from  miners'  houses 1,572.27 

Cartage  and  sale  of  coal  to  tenants 70.09 


$1,099,277.85   $1,099,277.85 


They  have  agreed  to  a  plan  whereby  the  coal  mine  oper- 
ations will  be  taken  over  by  a  new  corporation  and  therefore 
ask  that  you  separate  the  lumber  and  coal  accounts,  and  make 
up  a  separate  set  of  statements  in  detail  to  cover  each  busi- 
ness (balance  sheet,  surplus  account,  profit  and  loss  account 
and  statement  of  operations)  ;  the  capital  stock  to  stand 
as  part  of  the  lumber  accounts. 


I30 


C.    P.    A.    AUDITING    QUESTIONS 


You  find  as  follows : 

(1)  Bills  Receivable  account  was  balanced  and  closed, 
but  among  the  records  and  papers  of  the  company,  you 
found  bills  receivable  for  lumber  accounts  amounting  to 
$2,791.17  previously  charged  oflF,  but  now  considered  good 
and  collectible. 

(2)  Mine  No.  1  is  in  a  state  of  development  and  has 
not  been  as  yet  operated. 

(3)  Of  the  accounts  receivable,  $15,180.92  cover  coal 
shipments. 

(4)  Of  the  bills  payable,  $50,725.00  cover  mine  in- 
vestments. 

(5)  Unexpired  insurance  premiums  include  $726.10  on 
mine  policies  paid  for  account  of  the  new  corporation. 

(6)  Taxes  paid  in  advance,  $78.53  on  mine  properties. 

(7)  Of  the  surplus  before  closing  the  accounts,  $98,- 
958.44  arises  from  mine  operations  prior  to  the  year  ending 
June  30,  1909. 

(8)  Of  the  accounts  payable,  $12,790.79  cover  mine 
bills  audited. 

Show  the  necessary  journal  entries  to  adjust  the  ac- 
counts in  accordance  with  the  foregoing  explanations. 


The  Black  Diamond  Fuel  Co.  secures  a  charter  and 
capitalizes  with  an  authorized  issue  of  $250,000  common 
stock  and  $200,000  of  preferred  stock.  The  common  stock 
is  subscribed  for  as  follows : 

The  Gendron  Corporation $150,000.00 

W.    Wilson 50,000.00 

A.  Smith 50,000.00 

on  the  following  terms : 

(a)  The  Gendron  Corporation  to  transfer  all  assets  and 
liabilities  as  shown  by  your  statement  covering  the  mines 


WASHINGTON 


13 


property  to  the  Black  Diamond  Fuel  Co.  Any  equity  to 
apply  as  part  payment  on  the  subscription,  balance  to  be 
paid  on  call. 

(b)  Wilson  and  Smith  each  pay  $25,000  in  cash,  bal- 
ance on  call. 

Show  the  proper  entries : 

(1)  To  make  the  transfer  on  the  books  of  the  Gen- 

dron  Corporation,  and 

(2)  Entries  to  open  books  of  Black  Diamond  Fuel 

Co.  and  balance  sheet  after  so  doing. 


The  Potlatch  Lumber  Mfg.  Co.  is  incorporated  for 
$1,500,000,  of  which  the  Gendron  Corporation  subscribed 
for  25%,  the  Block  Lumber  Co.,  50%,  and  the  Columbia 
River  Lumber  Co.,  25%.  The  Potlatch  Co.  agreed  to  take 
over  the  lumber  business  of  each  of  the  three  concerns 
named.  It  is  understood  that  balances  due  to  the  con- 
tributing companies  on  purchase  account  are  to  be  applied  as 
part  payment  of  their  stock  subscription. 

(a)  The  Gendron  Corporation  agrees  to  dispose  of  its 
plant  for  $250,000,  reserving  its  timber  holdings ;  railroads 
and  other  equipment;  amount  due  from  Black  Diamond 
Fuel  Co.  on  account  of  mining  department  advances,  and 
$8,000  of  accounts  receivable  not  considered  collectible. 
Also,  it    assumes  all  liabilities  except  accounts  payable. 

(b)  The  other  companies  submit  the  following  balance 
sheets : 

BLOCK  LUMBER  CO. 

Balance  Sheet 

Cash  on  hand  and  in  bank $6,410.81 

Bills    receivable 2,131.55 

Bills  payable $77,191.94 

Lumber,  logs,  etc 52,176.59 

Unexpired  insurance  premiums 1,317.58 


132  C.    P.    A.    AUDITING    QUESTIONS 

Balance  Sheet  (Continued) 

Mill  supplies  and  extras 819.26 

Teams   2,859.65 

Standing  timber  and  lands 300,000,00 

Accounts  payable 15,197.94 

Surplus    401,321.76 

Mill  plant 60,500.00 

Accounts    receivable 67,496.20 


$493,711.64    $493,711.64 

COLUMBIA  RIVER  LUMBER  CO. 

Balance  Sheet 

Cash   $438.72 

Bills  receivable 6,008.91 

Lumber,  logs,  etc 97,303.43 

Unexpired  insurance  premiums....  417.93 

Mill  supplies,  etc 742.59 

Teams 62.50 

Bills  payable $39,604.38 

Standing  timber  and  lands 42,811.83 

Tug  boat 2,019.39 

Outside  investments 6,300.00 

Mill  plant 30,000.00 

Accounts  payable 7,912.84 

Surplus    172.093.42 

Accounts  receivable 33,505.34 


$219,610.64    $219,610.64 

(1)  Draft  opening  entries   for  the   Potlatch   Lumber 
Mfg.  Co. 

(2)  Prepare  balance  sheet  after  books  have  been  opened. 

(3)  Draft  closing  entries  for  the  Gendron  Corporation. 

(4)  Prepare  general  balance  sheet  of  the  Gendron  Cor- 
poration after  so  doing. 


ILLINOIS 


Question  J^21 

What  is  the  best  method  for  carrying  additions  to  plant 
on  the  books  of  a  manufacturing  corporation?  Give  rea- 
son for  answer. 

Question  J^22 

What  is  the  auditor's  responsibihty  in  the  matter  of 
vouchers  for  payment?  What  is  his  responsibihty  where 
there  are  not  any  regular  vouchers? 

Question  J^2S 

Can  an  examining  accountant  satisfy  himself  of  the 
general  correctness  of  inventories  without  himself  taking 
the  quantities  and  verifying  the  prices,  extensions,  and 
additions?     Give  full  particulars. 

Question  Jf2Jf 

Where  the  books  of  a  copartnership  or  corporation  show 
large  additions  to  buildings  and  machinery,  consisting  of 
portions  of  pay-rolls,  without  explanation,  what  means 
should  be  taken  to  prove  or  disprove  the  accuracy  of  the 
charges? 

Question  Jf25 

State  whether  depreciation  is  an  element  of  the  cost 
of  manufactured  products.     If  so,  why? 

133 


134  C.    P.    A.    AUDITING    QUESTIONS 

Explain  form  of  journal  entry  necessary  to  carry  de- 
preciation on  the  books,  and  explain  how  it  would  be  shown 
on  the  balance  sheet. 

Question  Jf26 

In  auditing  the  accounts  of  a  railroad  company,  what 
is  necessary  to  determine  whether  the  equipment  has  been 
fully  maintained? 

Question  Jf27 

Are  working  or  job  orders,  covering  a  company's  ex- 
penditures on  its  own  account,  of  any  value  to  the  auditor 
when  examining  the  general  books? 

Question  428 

In  auditing  the  books  of  a  business  which  is  to  be  dis- 
posed of  and  where  the  seller  guarantees  to  the  purchaser 
the  open  accounts  receivable,  what  action,  if  any,  should 
be  taken  by  the  auditor  as  to  such  accounts  receivable  ? 

Question  J^29 

After  the  organization  of  a  corporation,  it  proceeds  to 
construct  a  manufacturing  plant,  paying  for  the  same  in 
cash  realized  from  the  sale  of  capital  stock  at  80  cents  on 
the  dollar.  When  ready  for  operation,  what  items  would 
be  included  in  the  cost  of  such  a  plant? 

Question  1^30 

You  are  auditing  the  annual  accounts  of  a  company, 
which  possesses  amongst  other  assets  a  leasehold  ware- 
house, the  lease  of  which  has  still  another  forty  years  to 
run  from  the  date  of  the  last  balance  sheet,  at  which  time 


ILLINOIS 


ns 


it  stood  on  their  books  at  $100,000,  and  this  amount  still 
remains  unchanged.  The  lease  was  acquired  ten  years  ago 
on  the  formation  of  the  company  and  is  considered  to  have 
a  realizable  value  of  about  $150,000.  The  outlay  has  been 
incurred  as  to  $50,000  by  rebuilding  two  years  ago,  since 
which  time  nothing  has  been  written  off.  No  systematic 
treatment  of  the  subject  has  been  adopted,  but  considerable 
sums  have  been  written  off  from  time  to  time  out  of  the 
profits  earned  in  the  previous  years.  Dividends  are  only 
payable  out  of  the  profits  of  the  company.  As  auditor  of 
the  company  you  are  asked  to  decide  between  the  following 
views : 

(a)  Nothing  need  be  written  off  at  all,  because  the 
property  would  now  sell  for  what  it  stands  at  or  more. 

(b)  The  most  convenient  plan  is  to  continue  applying 
occasionally  such  profits  as  it  is  not  desired  to  distribute 
in  dividends. 

(c)  An  equal  40th  part  should  be  written  off  annually. 

(d)  A  sinking  fund  should  be  created  and  compounded 
so  as  to  produce  $100,000  in  forty  years. 

Criticize  each  of  the  above  plans,  stating  which  you  rec- 
ommend, if  any,  and  why. 

Question  JfSl 

You  are  appointed  the  auditor  of  an  estate  the  assets 
of  which  consist  of  real  estate  (improved  city  and  farm 
lands),  corporation  stocks  (common  and  preferred),  rail- 
road bonds  (with  coupons  attached  and  without  coupons 
attached),  and  first  mortgages  on  farm  property.  How  will 
you  verify  the  revenues  from  the  various  classes  of  assets, 
and  what  procedure  would  you  take  to  verify  the  existence 
of  these  assets  ?  In  your  first  audit  what  would  be  the  first 
two  things  you  would  examine? 


136  C.    p.    A.    AUDITING    QUESTIONS 

Question.  4S2 

An  investigation  of  the  details  of  an  inventory  dated 
January  1,  1904,  brings  to  light  the  following  entry : 

Contract  dated  July  1,  1903,  for  delivery  of  20,000  tons 

of  between  January  1st  and  June  30th,  1904, 

at  $25.00  per  ton,  the  market  price  at  date  of  inventory 
being  $27.50  —  $50',000.00. 

Discuss  the  validity  of  the  above  entry  under  the  fol- 
lowing circumstances : 

(a)  In  the  preparation  of  a  certified  balance  sheet 

for  stockholders'  meetings. 

(b)  In   investigation  on  behalf  of  a  client  who   is 

considering  the  purchase  of  the  majority  of 
the  capital  stock  of  the  company. 

(c)  In    investigation    and    preparation    of    certified 

balance  sheet  for  the  company  (the  company 
being  your  clients)  which  they  desire  to  sub- 
mit to  their  bankers. 

Question  J^SS 

A  corporation  has  a  capital  stock  of  $100,000.  It  has 
assets  at  inventory  value  amounting  to  $160,000.  With  a 
view  to  reducing  the  number  of  its  enterprises,  it  sells  two 
of  its  stores  for  $85,000  at  inventory  value.  This  $85,000 
is  distributed  among  its  stockholders.  What  entries  should 
be  made  upon  the  books,  and  what  procedure  would  you 
recommend  in  order  to  safeguard  all  interests  in  making 
such  distribution? 

Question  43^ 

A  company  incorporated  with  a  capital  of  $200,000, 
fully  paid  up,  has  sold  its  stock  at  a  premium  of  25%,  thus 


ILLINOIS  137 

realizing  in  cash  $250,000.  The  by-laws,  which  cannot  be 
amended  except  in  a  stockholders'  meeting  and  after  proper 
notice  of  such  amendment,  having  been  mailed  to  each 
stockholder  ten  days  prior  to  the  meeting,  contain  a  pro- 
vision that  the  $50,000  so  received  over  and  above  the  capi- 
tal stock  at  par,  shall  be  placed  to  the  credit  of  a  special 
reserve  account,  and  that  this  fund  shall  not  be  applicable 
towards  the  payment  of  dividends.  At  the  close  of  the 
first  fiscal  year,  it  is  found  that  the  company  has  made  a  net 
profit  of  $4,000  after  charging  $6,000  for  depreciation  on 
the  buildings  and  machinery.  The  directors  desire  to  pay 
a  cash  dividend  of  5%  and  pass  a  resolution  ordering  that 
the  depreciation  referred  to  above  shall  be  charged  against 
the  above  special  reserve  account  instead  of  against  profit 
and  loss,  and  they  then  proceed  to  declare  a  dividend  of  5%. 
Discuss  the  above  situation  from  the  standpoint  of  an 
accountant. 

Question  ^35 

While  auditing  the  accounts  of  a  jobbing  firm,  the 
cashier  and  bookkeq^er  disappears.  The  client  believes  he 
has  been  guilty  of  embezzlement,  and  asks  the  auditor  to 
report  as  quickly  as  possible  to  him,  what  sum,  if  any,  has 
been  taken.  The  auditor  tests  postings  of  cash  from  cus- 
tomers without  finding  irregularity,  and  also  finds  that  re- 
ceipts have  been  taken  and  are  on  file,  for  all  moneys  ac- 
tually paid.  Where  would  you  look  under  such  circum- 
stances for  the  method  pursued  by  the  probable  embezzler 
in  covering  a  shortage? 

Question  JfS6 

Give  method  of  preparing  a  balance  sheet  where  ledgers 
have  not  been  closed. 


138  C.    p.    A.    AUDITING    QUESTIONS 

Question  437 

In  the  case  of  a  consolidation  of  three  manufacturing 
concerns,  how  would  you  determine  the  good-will  of  the 
consolidated  company? 

Question  J^38 

When  auditing  the  accounts  of  a  wholesale  grocery- 
house  it  is  found  that  a  fire  has  just  destroyed  the  entire 
stock  of  merchandise.  What  course  would  you  follow  to 
approximate  the  inventory? 

Question  J^39 

At  the  first  annual  audit  of  the  books  and  accounts  of 
an  electric  street  railway  company  the  books  show  an  actual 
investment  exceeding  $1,000,000,  while  the  aggregate 
amount  of  repairs  and  renewals  for  the  year  have  been  but 
$10,000.  What  course  should  the  auditor  follow  in  pre- 
paring profit  and  loss  account  for  the  year? 

Question  J^JfO 

Criticize  the  following  profit  and  loss  account  and  bal- 
ance sheet  of  a  private  firm  trading  in  provisions,  from  the 
point  of  view  of  a  bank  which  contemplates  advancing 
$20,000  to  firm.  The  clerical  accuracy  of  the  books  has 
been  verified. 

PROFIT  AND  LOSS  ACCOUNT 

(Year  Ending  December  31st,  19(J5) 

Stock  at  1-1-5 $50,000.00 

Purchases    40,000.00 

Wages  and  salaries 8,000.00 

Office   and  general   expenses 7,000.00 

etc.*  15.000.00 


^Rather  unusual,  but  according  to  copy. 


ILLINOIS 

Profit  and  Loss  Account  (Continued) 

Interest  on  loans 2,700.00 

Bad  debts 800.00 

Profit    37,000.00 

$160,500.00 

Sales,  less  returns $80,000.00 

Stock  31-12-5 75,000.00 

Dividends  on  investment 5,500,00 

$160,500.00 

BALANCE  SHEET 

Assets 

Book  debts $250,000.00 

Stock  as  per  inventory 75,000.00 

Investments  at  cost 50,000.00 

Good-will    10,000.00 

Lease  on  premises 5,000.00 

Furniture,    etc 1,000.00 

Cash  in  hand 500.00 


139 


$391,500.00 


Liabilities 


Trade   creditors $344,500.00 

Loans   27,000.00 

Partners'  capital  account  at  1-1-5 $8,000.00 

Profit  for  year 37,000.00 

$45,000.00 
Less :    Drawings  during  year 25,000.00        20,000.00 

$391,500.00 


Question  4^1 

Before  certifying  a  balance  sheet  what  steps  should  an 
auditor  take  to  satisfy  himself  of  the  accuracy  of  the  valua- 
tion placed  upon  the  following  assets : 


I40  C.    R    A.    AUDITING    QUESTIONS 

(a)  Stock  in  trade 

(b)  Investments 

(c)  Plant  and  machinery 

(d)  Cash  in  hand  at  branch  establishments 

(e)  Patent  rights 

(f)  Patterns 

Question  4-^2 

It  is  contended  that  it  is  unnecessary  to  write  off  de- 
preciation on : 

(a)  Freehold  premises 

(b)  Plant  and  machinery 

provided  that  they  are  maintained  in  a  full  state  of  effi- 
ciency out  of  revenue. 

Give  briefly  your  own  views  on  this  subject. 

Question  JiJ^S 

A  corporation  issues  bonds,  proceeds  to  be  used  for 
construction  purposes.  If  bonds  are  all  sold  at  a  discount, 
to  what  account  should  the  discount  be  charged?  If  sold 
at  a  premium,  to  what  account  should  the  premium  be 
credited  ? 

Question  Jt-J/-Jf. 

In  a  public  utility  proposition,  how  does  the  auditor 
best  determine  the  reliability  of  the  revenue? 

In  passing  upon  discounts  and  bad  debts,  how  would 
you  state  them  in  reports  ? 

Question  Ji-^5 

Finance  corporations  holding  a  large  number  of  shares 
in   other  corporations   are   in  the   habit   of  valuing  their 


ILLINOIS 


141 


securities  for  balance  sheet  purposes  at  either  (a)  cost  price, 
or  (b)  market  price  at  the  date  of  the  balance  sheet. 

Discuss  the  respective  merits  of  the  two  methods  and 
say  which  you  consider  the  soundest  from  an  accountant's 
point  of  view. 

Question  JfJf-G 

You  are  called  upon  to  audit  the  books  of  a  "holding 
company,"  owning  90%  of  the  stocks  of  six  large  manu- 
facturing companies  scattered  over  the  United  States. 
From  the  books  of  the  "holding  company"  you  are  re- 
quested to  prepare  a  certified  balance  sheet  and  profit  and 
loss  account,  it  being  stated  that  it  is  not  to  be  used  for 
publication,  but  will  be  mailed  to  one  of  the  shareholders 
who  appears  to  be  disgruntled.  Balance  sheets  and  profit 
and  loss  accounts  of  the  subsidiary  companies  signed  by 
their  respective  secretaries,  are  produced  for  your  inspec- 
tion but  you  are  refused  access  to  the  actual  books  of  ac- 
count of  these  companies.  Explain  fully  what  your  course 
of  action  would  be  in  this  matter  and  your  reasons  therefor. 

Question  W 

You  are  called  upon  to  audit  the  books  of  account  of 
the  executors  and  trustees  of  an  estate.  The  executors 
completed  their  duties  18  months  after  the  death  of  decedent. 
Explain  the  essential  features  of  an  audit  of  this  character. 

Question  kh^ 

A  construction  company  is  carrying  out  work  on  a  num- 
ber of  contracts.  At  the  close  of  its  fiscal  year,  these  con- 
tracts are  in  all  stages  of  completion,  from  those  which  are 
just  begun  to  those  which  are  almost  finished.  How  should 
you  compute  their  value  as  an  asset  in  the  balance  sheet  ? 


142  C.    P.    A.    AUDITING    QUESTIONS 

Question  J/-Jf9 

In  determining  the  result  of  the  operations  of  a  com- 
pany whose  business  requires  the  use  of  a  large  number  of 
tools  and  implements,  what  general  rule  would  you  con- 
sider? 

Question  Jf50 

In  presenting  a  balance  sheet,  what  items  are  matter  of 
fact  and  what  items  are  opinions,  and,  taken  as  a  whole,  are 
you  establishing  a  fact  or  an  opinion? 

Question  J^51 

Can,  or  cannot,  a  going  concern,  employing  a  salaried 
manager  and  superintendents,  charge  any  part  of  their  sala- 
ries to  cost  of  improvements  or  extensions  that  may  be 
added  to  the  plant  at  intervals?    In  either  view,  why? 

Question  J^52 

You  are  elected  the  auditor  of  a  corporation  by  the 
holders  of  both  common  and  preferred  stock  and  it  is  your 
duty  to  safeguard  the  interests  of  both  classes  of  stock- 
holders. The  preference  stock  bears  Y%  and  is  non-cumu- 
lative. Mention  what  precautions  you  would  adopt  to  safe- 
guard the  interests  of  the  preference  shareholders,  giving 
reasons  therefor. 

Question  Jf53 

A  club  obtaining  its  revenue  from  initiation  fees,  dues, 
restaurant,  wines,  cigars,  billiards,  and  cards,  has  a  treas- 
urer who  reads  to  the  directors  at  each  monthly  meeting, 
a  statement  of  the  receipts  and  disbursements  of  the  month 
just  prior.  What  are  the  advantages  of  such  a  statement 
and  wherein  does  it  fall  short? 


ILLINOIS 


143 


Question  JfBJf 

Referring  to  the  preceding-  question  state  how  you 
would  handle  initiation  fees  in  the  preparation  of  the  club's 
annual  report  containing  balance  sheet  and  profit  and  loss, 
and  give  your  reasons  therefor. 

Question  455 

The  firm  of  Catchem  and  Cheatam  engage  in  a  restau- 
rant business  where  all  sales  are  for  cash,  with  the  express 
purpose  of  at  a  later  date  selling  out  same  on  the  strength 
of  the  large  profits  shown  on  the  books.  With  the  object 
in  view  they  grossly  pad  their  sales  every  day  and  make 
compensating  fraudulent  entries  on  the  disbursement  side 
of  the  cash  book  purporting  to  represent  cash  withdrawals 
of  partners,  and  all  records  by  which  the  cash  sales  might 
possibly  be  verified  are  destroyed.  Catchem  and  Cheatam 
make  a  proposition  to  Mr.  A.  to  sell  their  business  to  him 
and,  on  the  showing  of  profits  made  by  the  books,  Mr.  A. 
seriously  considers  the  same,  but  engages  a  certified  public 
accountant  to  make  an  examination.  The  accountant  for- 
tunately discovers  the  fraud.  How  did  he  probably  dis- 
cover the  fraud  and  what  was  his  method  of  procedure  ? 

Question  ^56 

The  audit  of  a  corporation  on  the  instructions  of  its 
president,  reveals  the  following  condition : 

ASSETS 

Real  estate,  plant  and  machinery. .  $500,000.00 

Merchandise  of  all  kinds 200,000.00 

Bills  receivable 50,000.00 

Accounts  receivable 275,000.00 

Sundries  accrued 4,500.00 

Cash 37,500.00 

I  $1,067,000.00 


144  C.    P.    A.    AUDITING    QUESTIONS 

LESS  LIABILITIES 

Bills  payable $250,000.00 

Accounts  payable 40,000.00 

290,000.00 

Net  resources $777,000.00 

The  capital  of  the  corporation  is  $1,000,000  with  deficit 
of  $223,000.  The  audit  brings  out  the  fact  that  included 
in  the  accounts  receivable  is  an  item  of  approximately 
$50,000  due  by  the  president  of  the  company.  In  certifying 
to  the  balance  sheet  the  president  requests  you  not  to  show 
as  a  separate  item  the  amount  due  by  him,  but  to  include  it 
as  shown  above  in  the  accounts  receivable  for  the  reason, 
you  are  informed,  that  your  certificate  is  to  be  used  for 
the  purpose  of  selling  $250,000  bonds  secured  by  mortgage 
on  the  real  estate,  plant,  and  machinery,  the  proceeds  of 
which  will  be  used  to  liquidate  the  present  bills  payable. 
The  president  of  the  company  is  reported  to  be  worth 
$200,000  over  and  above  the  value  of  his  stock  in  the  above 
company.  What  course  of  action  would  you  take?  State 
the  reasons  therefor.  If  the  certificate  was  stated  to  be  for 
the  purpose  of  handing  certified  balance  sheet  to  their 
bankers  or  to  present  to  annual  meeting  of  shareholders, 
then  what  would  be  your  course  of  action,  and  why? 

Question  J/-57 

The  senior  member  of  a  firm  of  certified  public  account- 
ants employing  about  fifty  assistants,  having  arrived  at  an 
age  when  he  no  longer  cares  to  be  actively  engaged,  retires ; 
but  the  partnership  agreement  provides  that  he  shall  still 
retain  a  one-fourth  interest  in  the  profits  on  account  of  the 
good-will  attached  to  his  name.  Three  years  after  he  has 
ceased  to  be  actively  engaged  in  the  business,  the  profits 


ILLINOIS  145 

drop  considerably,  and  fearing  that  his  partners  are  not 
acting  squarely  he  proceeds  to  audit  the  accounts  of  the 
firm.  If  you  were  in  his  place  how  would  you  proceed  to 
audit  same  and  satisfy  yourself  that  everything  was  prop- 
erly accounted  for  or  otherwise? 

Question  j^58 

An  auditor  is  engaged  by  a  man  who  is  buying  an  inter- 
est in  a  firm,  for  the  purpose  of  reporting  upon  the  assets 
and  liabilities  of  the  firm  as  at  a  given  date  and  upon  the 
profits  of  the  three  years  just  prior.  Upon  the  auditor's 
report  he  purchased  an  interest  in  the  firm  and  in  its  assets 
and  liabilities.  Six  months  later  it  is  discovered  that  there 
were  bills  payable  due  by  the  firm  amounting  to  $10,000  at 
the  time  the  auditor  made  his  examination  and  not  reported 
upon  by  him,  and  that  these  bills  had  continuously  been  due 
by  the  firm  for  one  year  prior  to  such  examination,  but  no 
record  of  same  had  been  made  upon  the  books.  Under 
what  circumstances  could  the  auditor  be  considered  guilty 
of  negligence  in  not  discovering  this  fact  and  under  what 
circumstances  could  he  be  considered  entirely  free  of  any 
blame  in  the  matter  ? 

Question  J/-59 

An  auditor  is  called  upon  to  verify  a  balance  sheet,  and 
upon  investigation  he  finds  that  unexpired  insurance,  interest 
paid  in  advance  on  discounted  notes,  taxes  accrued,  interest 
accrued  on  demand  notes  and  bonded  indebtedness,  royal- 
ties, etc.,  are  not  included  in  same.  He  is  informed  that  it 
has  not  been  the  custom  of  the  corporation  to  include  in 
their  balance  sheet  such  items,  as  they  offset  one  another, 
and  that  the  directors  do  not  desire  any  change  in  the  prac- 
tice they  have  adopted.  Discuss  this  proposition,  stating 
reasons  for  your  conclusions. 


146  C.    p.    A.    AUDITING    QUESTIONS 

Question  Jf60 

In  the  examination  of  the  accounts  of  a  brewery,  how 
would  you  determine  whether  the  amount  of  beer  produced 
and  disposed  of  during  the  year  was  in  proper  relation  to 
the  conditions  disclosed  by  final  inventories  ? 

Question  Ji.61 

An  interurban  railway  company,  wishing  to  provide 
against  possible  accidents,  adopted  the  plan  of  depositing 
2%  of  their  gross  receipts  each  month  in  a  local  savings 
bank  as  a  reserve  for  that  purpose,  charging  the  funds  so 
set  aside  to  an  account  which  they  designated  "Reserve  for 
Accidents."  The  total  fund  for  the  year  amounted  to 
$4,869.26,  out  of  which  they  paid  $950  for  accidents  occur- 
ing  and  settled  during  the  twelve  months,  debiting  such 
payment  to  Accident  account,  and  leaving  a  cash  balance 
in  the  bank  on  December  31,  of  $3,919.26. 

The  bookkeeper  endeavored  to  close  the  books  by  show- 
ing the  $4,869.26  as  a  charge  against  operating  for  the 
year  arising  out  of  accident  liability,  carrying  over  the  bal- 
ance in  bank  ($3,919.26)  to  provide  for  future  accidents, 
and  making  a  corresponding  credit  to  the  "Reserve  for 
Accidents"  account.  This  left  the  company  with  cash  assets 
of  $3,919.26  not  represented  on  the  books. 

Wherein  did  the  bookkeeper  err  and  what  entries  should 
have  been  made  to  show  the  transaction  correctly  ? 

Question  Jf62 

In  making  an  audit  of  a  large  bank  where  many  of  the 
bills  discounted  are  in  the  form  of  demand  notes  upon 
which  partial  payments  of  principal  and  interest  are  per- 
mitted to  be  made,  and  where  in  many  instances  the  cus- 
tomer, as  he  hands  in  his  check,  does  not  wait  to  see  an 


ILLINOIS  147 

indorsement  of  the  payment  actually  made  at  the  time  by 
the  bank  employee,  how  would  you  assure  yourself  that 
none  of  the  entries  covering  such  partial  payments  were  held 
over  until  the  next  day,  while  the  check  or  currency  might 
be  slipped  into  the  teller's  cash? 

Question  ^63 

In  the  examination  of  the  accounts  of  an  important 
railroad,  it  appears  that  none  of  the  invoices  and  material 
purchased  appear  on  the  company's  books  until  they  have 
been  approved  by  the  purchasing  agent  and  division  super- 
intendents, although  the  various  storekeepers'  reports  show 
that  much  of  the  material  and  supplies  has  actually  been 
received. 

How  would  you  proceed  to  determine  the  liability  of  the 
mine  the  real  position  of  the  railroad  with  respect  to  pur- 
chases not  taken  up  on  the  voucher  register? 

Question  Jj.6Jf 

In  examining  the  affairs  of  a  private  country  bank,  it 
is  ascertained  that  no  record  of  certificates  of  deposit  has 
been  kept  except  in  the  general  ledger.  It  also  appears  that 
partial  payments  have  been  occasionally  made  on  certain 
certificates  which  are  still  in  the  hands  of  the  depositor. 

How  would  you  proceed  to  determine  the  liability  of  the 
bank  with  respect  to  certificates  of  deposit  outstanding? 

Question  Jf-65 

Assuming  that  all  cash  discounts  on  purchases  made 
during  the  year  have  been  taken  advantage  of,  and  the 
ledger  account  shows  a  substantial  credit,  to  what  account 
would  you  close  the  balance?  In  the  case  of  a  jobbing 
concern?    Of  a  manufacturer? 


148  C.    p.    A.    AUDITING    QUESTIONS 

Question  Jf66 

In  the  case  of  a  street  railway  which  allows  its  con- 
ductors to  sell  tickets  covering  transportation  for  ten  and 
twenty-five  rides  at  a  lower  rate  than  it  demands  for  cash 
fares,  how  would  you  apportion  the  revenue  so  received, 
bearing-  in  mind  that  at  the  end  of  each  month  many  tickets 
remain  unredeemed. 

Question  Jf67 

In  a  large  country  store  containing  several  departments 
considerable  produce  is  taken  in  the  grocery  section  from 
farmers  and  others,  for  which  trading  orders  are  issued 
redeemable  in  merchandise  only  through  the  other  depart- 
ments. How  would  you  determine  the  profit  or  loss  in  each 
department  ? 

Question  468 

A  trading  and  mining  company  maintains  five  general 
stores  at  each  of  five  separate  stations,  and  concentrates  its 
supplies  each  year  at  Station  A,  which  is  the  only  one  ac- 
cessible by  railway,  and  distribution  is  made  from  thence 
by  means  of  wagon  and  pack  trains.  The  cost  of  goods 
laid  down  at  Station  A  is  10%  above  invoice  prices  at  the 
company's  general  office  in  Montana;  and  the  agent  at 
Station  A  is  instructed  to  rebill  all  shipments  to  Station  B 
at  20%  above  original  invoice  cost;  to  Station  C  at  35%  ;  to 
Station  D  at  40%,  and  to  Station  E  at  50%,  the  experience 
of  several  years  bearing  out  the  general  manager's  state- 
ment that  such  additions  are  approximately  correct  and 
cover  actual  cost  of  transportation. 

In  auditing  the  accounts  for  the  purpose  of  certifying 
the  annual  balance  sheet,  you  ascertain  that  certain  goods  at 
Station  D  amounting  to  $10,000,  are  inventoried  by  the 
agent   at  that  point  at   70%    above  the  original   invoices 


ILLINOIS 


w 


which  you  have  examined  at  the  home  office.  He  states 
that  Station  E,  being  overstocked,  shipped  him  several  lots 
of  merchandise  at  price  billed  out  to  E  by  Station  A,  plus 
10%  for  estimated  cost  of  handling  and  repacking  at  E ;  and 
to  this  D  legitimately  added  10%  for  cost  of  transportation 
from  E  back  to  D. 

In  your  visit  to  other  stations  you  find  many  similar 
instances  where  goods  have  been  moved  back  and  forth 
and  each  time  the  shipping  station  has  added  10%  for 
handling  and  repacking. 

Out  of  a  total  inventory  at  all  stations  of  goods  origi- 
nally costing  $200,000,  the  summary  shows  final  extensions 
of  values  aggregating  $325,000,  of  which  not  more  than 
$75,000  is  covered  by  cost  of  transportation,  leaving  some 
$50,000  represented  by  internal  charges  added  between  the 
different  stations. 

Review  the  foregoing  statement  and  give  your  method 
of  handling  such  accounts. 

Question  4^9 

In  making  an  audit  of  the  accounts  of  a  corporation, 
would  you  consider  it  part  of  your  duty  to  verify  the  trans- 
fers of  the  certificates  of  capital  stock  occurring  during  the 
period  covered  by  your  examination  ? 

Question  470 

In  financing  a  manufacturing  company,  it  is  considered 
necessary  to  arrange  for  an  issue  of  $300,000  first  mort- 
gage 5%  20-year  bonds,  $500,000  6%  non-cumulative  pre- 
ferred stock  which  may  be  retired  any  time  after  five  years, 
and  $1,000,000  common  stock.  The  bonds  are  disposed 
of  at  90%  of  their  face  value  and  proceeds  used  for  erecting 
buildings  and  purchase  of  machinery  and  equipment. 


I^o  C.    P.    A.    AUDITING    QUESTIONS 

The  preferred  stock  is  sold  at  85  and  one  share  of  the 
common  stock  is  given  with  each  share  of  preferred  stock, 
the  common  stock  remaining  being  disposed  of  at  40.  How 
could  you  deal  with  the  discount  in  each  case? 

Question  J^ll 

A  company  whose  capital  stock  is  $250,000,  divided 
into  $100,000  6%  non-cumulative  preferred  shares  and 
$150,000  common  shares,  begins  its  life  with  an  excess  of 
liabilities  over  real  assets  to  the  extent  of  $10,500,  which 
sum  is  debited  to  Suspense  account.  During  the  first  few 
years  small  losses  are  made  and  carried  forward  on  the 
Profit  and  Loss  account,  but  finally  sufficient  profits  are 
earned  to  wipe  out  the  losses  of  the  previous  years  and 
leave  a  balance  of  $16,500. 

The  holders  of  the  preferred  stock  claim  that  any  sur- 
plus profit,  after  payment  of  the  preference  dividend,  should 
be  used  to  extinguish  the  Suspense  account. 

The  holders  of  the  common  stock  claim  that  all  of  such 
surplus  is  properly  available  for  their  dividend  on  the 
ground  that  the  original  deficiency  carried  to  Suspense  ac- 
count was  in  efYect  a  charge  to  good-will. 

Give  briefly  your  understanding  of  "good-will."  State 
how  you  would  deal  with  it  in  this  case,  and  whether  the 
directors  may  pay  any  dividend  on  the  common  stock. 

Question  Ji.72 

A  suburban  traction  company,  after  equipping  its  line 
at  a  very  considerable  expense  for  overhead  trolley  and 
operating  same  for  several  years,  decides  to  adopt  the 
third-rail  system.  Extensive  changes  are  necessary  in 
changing  power-houses,  rearranging  tracks  and  altering 
cars,  involving  an  expenditure  of  $25,000.     In  addition, 


ILLINOIS 


151 


considerable  machinery  and  rolling  stock,  the  original  cost 
of  which  had  been  treated  as  a  capital  outlay  and  was  car- 
ried on  the  books  at  a  valuation  of  $25,000,  is  rendered 
obsolete  and  is  disposed  of  for  e$3,500,  showing  a  loss  of 
$21,500.  The  profits  from  operation  for  the  year  are 
$18,000. 

State  how  you  would  recommend  that  the  matter  be 
dealt  with  in  the  company's  accounts,  and  whether  the 
company  can  pay  a  dividend. 

Question  Jf-73 

In  examining  the  partnership  accounts  of  Black  & 
Brown  you  ascertain  that  the  capital  of  $20,000  has  been 
provided  equally,  and  the  articles  of  partnership  provide 
that  if  any  excess  capital  is  supplied  by  either  partner,  in- 
terest at  the  rate  of  5%  per  annum  shall  be  allowed.  Black 
pays  in  $5,000  additional  and  is  credited  at  the  end  of  the 
year  with  5%  on  same,  which  equals  $250,  which  is  debited 
to  Brown.  State  whether  you  consider  this  correct  and 
give  reasons  for  your  answer. 

Question  J^7Jf. 

In  the  examination  of  a  business  you  find  that  all  past 
due  accounts  receivable  are  promptly  charged  to  a  sus- 
pense account  and  the  suspense  account  is  plainly  stated  on 
the  balance  sheet  among  the  assets.  Do  you  consider  this 
satisfactory;  or  what  form  of  account  would  you  recom- 
mend should  be  set  up  to  care  for  such  items  ? 

Question  J/.75 

State  how  you  would  deal  with  the  following  items  of 
account  in  making  an  audit  of  an  Illinois  company: 


1^2  C.    P.    A.    AUDITING    QUESTIONS 

(a)  Premium  paid  for  a  lease. 

(b)  Commission  on  an  issue  of  capital  stock. 

(c)  Discount  on  an  issue  of  bonds,  proceeds  of  which 

are  used  for  plant  construction. 

(d)  Expenses  incidental  to  organization. 

(e)  Cost  of  removing  certain  machinery  to  a  different 

part  of  the  works  and  adding  some  new  ma- 
chinery. 

Give  reasons  for  your  answers  in  each  case. 

Question  Jf.76 

In  large  businesses  internal  auditors,  members  of  the 
staff  of  the  concern,  are  frequently  the  only  ones  employed. 
Where  this  is  the  case,  do  you  think  it  desirable  that  pro- 
fessional certified  public  accountants  should  be  engaged? 
If  so,  give  your  reasons. 

Question  Jf.77 

Assuming  that  you  have  been  appointed  auditor  to  a 
corporation  or  private  firm  on  its  formation,  and  have  been 
asked  to  state  for  the  guidance  of  the  cashier  and  book- 
keeper the  requirements  you  would  expect  to  have  been  ful- 
filled when  you  come  to  make  the  audit,  write  out  detailed 
instruction  in  the  form  you  would  actually  give  them 

Question  ^78 

What  evidence  would  you  require,  first,  as  to  the  exist- 
ence of  assets  (other  than  book  debts)  shown  in  a  balance 
sheet;  and,  secondly,  as  to  the  correctness  of  the  amounts 
at  which  they  were  entered  in  the  books  ? 


ILLINOIS  153 

Question  470 

Does  an  auditor's  duty  in  any  way  extend  beyond  the 
careful  examination  and  certifying  of  the  books  and  ac- 
counts submitted  to  him  ?    Discuss  different  theories. 

Question  480 

To  what  extent  do  you  consider  it  an  auditor's  duty  to 
examine  into  and  report  upon  the  stock  inventories  and  the 
methods  by  which  the  stock  has  been  taken  and  valued  ? 

Question  481 

A  company  shows  among  its  assets  $2,675  as  unexpired 
insurance  on  January  1,  1907.  On  February  1,  1907,  the 
plant  is  destroyed  by  fire  and  a  total  loss  of  $57,875  oc- 
curs, which  the  insurance  company  pays.  How  would  you 
treat  the  $2,675  unexpired  insurance  item? 

Question  482 

In  auditing  the  accounts  of  a  manufacturing  company 
would  you  consider  it  proper  to  allow  the  Profit  and  Loss 
account  to  be  credited  with  profit  on  uncompleted  work? 

Question  483 

State  your  understanding  of  a  ''continuous  audit." 
What  are  its  advantages  over  a  yearly  or  half-yearly  audit? 
Can  you  point  out  any  special  dangers  to  which  it  is 
exposed  ? 

Question  45-1 

Explain  shortly  the  effect  of  a  fall  of  the  Tael  on  each  of 
the  following: 


154  C.    P-    A.    AUDITING    QUESTIONS 

A  Chicago  concern   carrying  on   a  general  trading 

business  in  China. 
A  Chicago  corporation  owning  a  railroad  in  China. 
A   Chicago-Chinese  bank. 

Confine  your  answer  to  the  effect  that  the  variation  in 
exchange  should  have  on  the  published  accounts. 

Question  Jf.85 

A  corporation  purchased  a  business  as  a  going  concern 
on  January  1st,  1908,  with  a  right  to  the  profits  from  Oc- 
tober 1st,  1907.     Its  capital  is : 

5%  first  preferred  stock $250,000.00 

6%  second  preferred  stock $250,000.00 

Common  stock .$124,000.00 

The  year's  profits  to  September  30th,  1908,  are  found 
to  have  been  $38,320.  What  appropriation  of  such  profits 
would  you  consider  to  be  correct  ? 

Question  J/.86 

A  cash  book  exists  with  three  columns  on  each  side,  viz., 
debit  side:  Discounts,  Cash  Receipts,  Bank;  credit  side: 
Discounts,  Cash  Payments,  Bank. 

In  making  an  audit,  you  find  that  the  cashier  closed  his 
cash  book  at  the  end  of  a  month,  bringing  down  a  cash  bal- 
ance of  $177.91;  you  count  his  cash  and  find  that  he  has 
only  $119.12.  On  going  carefully  through  the  month's 
transactions,  you  find  that  $45.37  paid  in  cash  had  been 
entered  in  the  bank  column;  the  total  of  a  previous  page 
of  cash  receipts,  $2,516.25,  was  brought  forward  as  $2,- 
525.75;  the  discount  $2.50  on  an  account  paid  had  been 
entered  in  the  cash  column  as  a  payment  instead  of  in  the 
discount  column ;  $10  received  from  a  partner  for  payment 


ILLINOIS  155 

of  private  account  had  been  included  in  the  cash  in  hand, 
but  not  entered  in  the  cash  book. 

Rule  a  form  of  cash  book  as  above,  enter  the  balance 
brought  down,  and  make  entries  to  correct  the  errors  above 
described.  Show  the  deficiency  still  existing,  and  state  how 
it  should  be  dealt  with. 

Question  ^87 
Reply  to  the  following  letter : 

Dear  Sir: 

We  wish  you  to  audit  our  accounts  for  the  past  ten  years  and 
to  report  thereon.  In  your  report  please  state  what  dividend  may 
in  your  opinion  be  fairly  expected  in  the  future  if  the  business  is 
taken  over  by  a  corporation  with  a  paid  up  capital  of  $500,000. 
The  capital  of  the  partners  during  the  period  named  has  been 
$375,000,  and  the  profits  divided  have  averaged  over  15%,  as  shown 
by  the  accounts  you  are  asked  to  verify. 

Yours  very  truly, 

Smith  &  Brown. 

Question  Jf.88 

An  attorney-at-law  joined  an  established  firm  in  part- 
nership without  having  the  books  investigated,  relying  on 
the  firm's  statement  that  they  are  making  a  certain  profit. 
After  several  months  have  elapsed,  the  new  partner,  not 
being  satisfied,  instructs  you  to  audit  the  accounts  for  the 
year  immediately  prior  to  his  joining  the  firm.  You  dis- 
cover that  no  break  has  been  made  in  the  books  for  years ; 
what  steps  would  you  take  to  ascertain  the  exact  profit  for 
the  year? 

Question  J^89 

In  the  case  of  a  corporation  the  management  suggests 
the  diminution  or  suppression  of  depreciation  on  plant  and 
machinery  on  these  grounds: 


156  C.    p.    A.    AUDITING    QUESTIONS 

(a)  Nothing  need  be  written  off,  as  the  plant  is  ac- 

tually more  valuable,  owing  to  a  rise  in  the 
cost  of  similar  machinery. 

(b)  Repairs  have  been  fully  maintained,  and  the  plant 

is  as  good  as  ever. 

(c)  To  charge  depreciation  to  the  same  extent  as  in 

a  good  year  wnll  prevent  a  dividend,  with  con- 
sequent outcry  by  stockholders,  and  fall  in  the 
price  of  shares. 

Combat  these  arguments. 

Question  J^90 

A  corporation  formed  to  invest  in  certain  classes  of 
securities  has  made  a  serious  loss  on  paper,  by  a  fall  in  the 
price  of  some  of  its  purchases,  while  it  has  earned  enough 
on  income  to  pay  the  usual  dividend. 

How  should  this  be  dealt  with  in  the  annual  accounts? 

Question  491 

A  fraudulent  cashier  has  embezzled  some  of  the  money 
passing  through  his  hands.  The  books  are  kept  on  a  double- 
entry  system,  and  he  has  access  not  only  to  the  cash  book, 
but  also  to  the  journal  and  ledger. 

Point  out  eight  distinct  methods  by  which  he  may  try 
to  conceal  his  theft. 

Question  Jf92 

The  directors  of  a  certain  company  desire  you  to  make 
a  thorough  audit  of  the  accounts  and  state  in  your  certifi- 
cate "that  the  books  are  correct  and  all  transactions  have 
been  properly  recorded."  Draft  the  form  of  certificate  you 
would  give. 


ILLINOIS 


157 


Question  J/-93 

State  the  items  of  income  or  expenditure  which  you 
would  add  to  or  take  from  the  profits  of  a  firm  (as  shown  by 
the  books)  in  preparing  a  certificate  to  be  used  in  the  pros- 
pectus of  a  company  which  has  been  formed  to  take  over 
the  business. 

Question  Jt-OJf. 

A  company  organized  June  30th,  1909,  purchased  the 
plant  and  business  of  a  private  firm  as  of  January  1,  1909, 
i.e.,  the  company  is  to  have  the  entire  profit  which  may 
have  been  made  from  January  1  to  June  30.  How  would 
you  apportion  the  year's  profits  in  making  up  the  accounts 
on  December  31,  1909  ? 

Question  Jf95 

A  newly  organized  company  permits  its  shareholders  to 
pay  in  advance  of  certain  calls  made  against  their  subscrip- 
tions, and  allows  them  interest  on  such  advances.  How 
should  interest  so  paid  be  treated  in  the  accounts,  or  is  it 
dependent  upon  subsequent  profit? 

Question  Jf96 

During  the  audit  you  are  making  of  the  accounts  of  a 
corporation,  you  become  aware  of  a  claim  agamst  the  com- 
pany which  you  think  is  likely  to  be  enforced,  but  which 
the  directors  do  not  recognize,  and  for  which  they  will  make 
no  reserve.    What  would  you  do  in  the  circumstances? 

Question  Jf97 

A  corporation  is  established  for  working  a  patent  of 
which  ten  years  are  expired,  and  for  which  a  sum  of  money 
has  been  paid.  How  should  the  company  deal  with  this 
asset,  and  what  is  the  duty  of  the  auditor  in  respect  of  it? 


158  C.    p.    A.    AUDITING    QUESTIONS 

Question  498 

How  should  an  incorporated  coal  company  estimate  the 
value  of  its  colliery  in  its  balance  sheet  from  time  to  time, 
first  as  a  freehold,  secondly  as  a  leasehold  ? 

Question  499 

In  the  case  of  an  incorporated  company  making  consid- 
erably more  profit  than  usual  in  one  year,  owing  to  exten- 
sive purchases  on  a  rising  market,  would  you  advise  de- 
claring a  proportionately  larger  dividend,  or  what  would 
be  your  recommendation?     State  your  reasons. 

Question  500 

In  auditing  the  books  of  an  importing  and  domestic 
wholesale  wine  and  liquor  dealer,  how  would  you  assure 
yourself  of  the  correctness  of  the  inventory  as  to  the  bonded 
stock  ? 

Question  501 

Beyond  the  mere  detailed  checking  of  purchase  invoices 
to  the  ledger  accounts  with  dealers,  can  you  suggest  any 
steps  that  might  be  taken  which  might  be  advisable  with 
the  view  of  the  prevention  of  fraud? 

Question  502 

A  corporation  invests  its  reserves  outside  its  business. 
On  the  audit  of  the  accounts  explain  what  steps  you  would 
take  to  verify  the  full  receipt  of  the  investment  income  and 
the  safe  custody  of  the  trust  funds? 

Question  503 

Upon  the  audit  of  the  partnership  accounts  of  a  manu- 
^actiti^g  business  the  following  conditions  are  revealed : 


ILLINOIS 


159 


(1)  Sales  toward  the  end  of  the  period  are  unusually- 

large. 

(2)  A  large  deposit  in  bank  is  made  on  the  closing 

fiscal  date,  which  amount  is  credited  to  the 
bank  two  weeks  later. 

(3)  Machinery  sold  has  been  credited  to  merchandise 

sales. 

(4)  A  loan  to  the  firm  has  been  credited  by  mutual 

consent  to  the  capital  account  of  one  of  the 
partners. 

(5)  Depreciation  or  discount  from  the  value  of  a 

certain  class  of  the  inventory  instead  of  being 
30%  as  in  prior  years,  is  shown  as  10%. 
What  would  you  deduce  from  these  facts,  and  what 
would  you  feel  called  upon  to  do  by  way  of  extended  in- 
quiry or  report  in  each  of  these  instances? 

Question  SOJ/. 

A  Chicago  corporation  does  business  in  Brazil  where 
its  capital  is  invested,  a  balance  sheet  and  profit  and  loss 
account  in  Brazilian  currency  being  sent  over  at  the  end 
of  each  year  for  amalgamation  with  the  Chicago  accounts. 
During  the  last  year  assume  that  a  heavy  fall  in  exchange 
took  place,  say  from  54  cents  per  milreis  to  36  cents.  At 
what  rate  of  exchange  would  you  take  the  Brazilian  assets 
for  the  purpose  of  the  American  balance  sheet  ?  Would  you 
treat  the  buildings,  machinery  and  plant  differently  from 
the  floating  assets?    Explain. 

Question  505 

The  $500  6%  bonds  of  a  corporation  are  issued  at  $450 
redeemable  at  par,  by  ten  annual  drawings.  How  would 
you  treat  these  bonds  in  the  profit  and  loss  account  and 
balance  sheet? 


l6o  C.    P.    A.    AUDITING    QUESTIONS 

Question  506 

The  following  profit  and  loss  account  is  presented  to 
you  for  audit  by  the  directors  of  a  company,  who  intimate 
their  willingness  to  modify  it  in  accordance  with  your  sug- 
gestions. How  would  you  redraw  it  so  as  to  show  the  exact 
profit  for  the  period  under  audit? 

By  Interest  on  invest- 
ments    $4,660.00 

"     Inventory   17,806.00 

"     Sales   83,236.00 

"     Balance   from  last 

year  2,627.00 

"     Sundries 12.00 

"     Reserve       fund 

transferred   ....  2,000.00 


Inventory    , 

.     15,325.00 

Bad  debts 

1,242.00 

Interim  dividend. 

.      5,000.00 

Depreciation    

650.00 

Purchases    , 

.     66,728.00 

Directors'  fees. . . . 

2,000.00 

Proposed  dividend      4,000.00 

Salaries   

,       2,463.00 

General  expense.. 

3,791.00 

Wages  

7,402.00 

Balance  

68.00 

$110,341.00 

$110,341.00 


Question  507 

What,  in  your  opinion,  is  the  best  method  of  stating  the 
profit  and  loss  account  of  a  trading  corporation  so  that  it 
shall  give  the  greatest  possible  desirable  information  to  the 
stockholders. 

Question  508 

A  corporation  took  an  inventory  of  its  stock  on  Decem- 
ber 31,  1910,  at  which  time  it  was  overdrawn  at  its  bank 
about  $25,000.  It  kept  its  cash  book  open  (as  of  December 
31)  for  the  greater  part  of  January,  during  which  time 
there  was  collected  from  customers  over  $240,000,  and 
$176,000  of  this  was  applied  to  payment  of  liabilities 
accruing  in  January. 


ILLINOIS  l6l 

State  the  effect  of  these  January  transactions  upon  the 
financial  showing  and  your  attitude  as  auditor  in  certifying 
to  the  statement. 

Question  609 

During  the  past  fiscal  year  a  concern  under  audit  has 
not  shown  profit  sufficient  to  justify  paying  a  dividend.  The 
manager  in  order  to  avoid  showing  a  loss  disregards  the 
usual  depreciation  reserve  charges  for  structures,  plant, 
machinery,  tools,  and  implements. 

What  would  be  your  view  as  auditor  under  the  circum- 
stances?   Give  reasons  as  a  feature  of  your  report. 

Question  510 

In  reviewing  the  schedules  of  open  customers'  accounts 
receivable  for  the  purpose  of  setting  up  a  reserve  against 
irrecoverable  amounts,  how  would  you  proceed?  Lay  out 
your  method  and  state  what  conditions  would  prompt  in- 
quiry as  to  a  possible  default  in  any  one  item. 

How  should  a  reserve  for  cash  discounts  on  outstanding 
accounts  receivable  be  computed  ? 

Question  511 
In  an  audit  if: 

(a)  Cash  is  received  but  not  properly  accounted  for. 

(b)  Cash  is  paid  for  goods  that  were  never  delivered. 

(c)  Cash  is  paid  for  wages  that  were  not  earned. 

All  with  fraudulent  intent;  state  concisely  what  means 
you  would  devise  to  prevent  such  happening  in  the  future. 

Question  512 

What  is  the  auditor's  duty  as  to  the  inventory  of  a 
manufacturer's  stock  on  hand : 


l62  C.    p.    A.    AUDITING  QUESTIONS 

(1)  As  to  the  prices  of  raw  material. 

(2)  As  to  quantities  of  all  items. 

(3)  As  to  the  extensions,  additions,  and  summaries. 

(4)  As  to  the  conditions  of  schedules  and  summa- 

tions comparatively  with  those  of  the  opening 
of  the  term. 

(5)  As  to  obsolete,  spoilt,  uncatalogued,  or  pattern 

goods. 

(6)  As  to  its  effect,  in  ratio,  as  a  total  on  the  gross 

profit. 

Question  513 

Distinguish  between  a  ^'continuous"  and  "completed" 
audit,  and  state  what  you  understand  by:  (1)  a  cash  audit; 
(2)  a  financial  or  balance  sheet  audit;  and  (3)  a  general 
audit. 

Question  51Jf 

What  general  procedure  would  you  follow  in  auditing 
the  receipts,  or  debit  side  of  the  cash  book,  of  a  manufac- 
turing company  where  the  transactions  were  not  too  numer- 
ous to  render  a  complete  detailed  audit  impracticable,  and 
state  what  features  of  the  audit  you  would  omit  where  the 
transactions  were  too  numerous  to  permit  of  a  complete 
detailed  audit. 

Question  515 

In  the  balance  sheet  of  a  concern  under  audit  you  find 
the  accounts  receivable  and  payable  to  be  as  follows: 

Accounts   receivable: 

Chicago    (head    office)    debtors $95,650.00 

St.    Louis    branch    account 2,425.00 

Atlanta   branch   account 4,730.00 

New  Orleans  branch  account 1,725.00 

Accounts  payable: 

Chicago  (head  office)  creditors $41,500.00 

New  York  branch  account 7,200.00 

Montreal  branch  account 3,752.00 


ILLINOIS 


163 


What  adjustments  in  the  balance  sheet,  if  any,  would  be 
necessary  in  order  that  an  unqualified  certificate  might  be 


given  ? 


Question  516 


Criticize  the  following  balance  sheet  from  both  the 
auditor's  standpoint  and  that  of  the  company's  financial 
position;  assuming  that  the  bonded  indebtedness  outstand- 
ing is  $200,000. 

A.  B.  COMPANY 

BALANCE  SHEET— DECEMBER  31,  1911 

Assets 

Real  estate,  buildings,  plant,  machinery, 
equipment,  and  other  permanent  investments, 
including  good-will $1,000,000.00 

Investments  in  stocks  and  bonds  at  cost 
(market  value  $60,000) 100,000.00 

Current  Assets: 
Inventories: 

Raw  materials $170,000.00 

Finished     stock     at     selling 

prices,  less  discount  5%.. . .  100,000.00 
Consignment  (selling  value)  .  50,000.00 
Supplies  (estimated) 200,000.00 

$520,000.00 

Accounts  and  bills  receivable, 
including  advances  to  em- 
ployees          125,000.00 

Stock  in  treasury  (unissued): 

Preferred   $150,000.00 

Common   137,225.00      287,225.00 

Investments  in  subsidiary  com- 
panies          225,500.00 

Cash  and  miscellaneous  items..        50,500.00      1,208,225.00 

$2,308,225.00 


l54  C.    P.    A.    AUDITING    QUESTIONS 

Liabilities 

Capital  stock: 

Preferred   stock $500,000.00 

Common  stock 750,000.00 

Bonds  and  bankers'  loans 575,000.00 

Current  Liabilities: 

Accounts    payable $15,225.00 

Other   indebtedness 231,000.00 

Accrued    items 2,000.00         248,225.00 

Reserves: 

For   depreciation $50,000.00 

Less:       Renewal      expenditures 
written   off 65,a)0.00 

Balance  (debit) $15,000.00 

For  bad  debts 20,000.00 

Other  contingencies 5,000.00  10,000.00 

Surplus  (less  dividends  paid)  in- 
cluding appreciation  in  real  es- 
tate and  other  capital  assets  and 
profit  on  inventorying  raw  ma- 
terials at  market  prices 225,000.00 

$2,308,225.00 

Question  517 
You  find  in  the  course  of  an  annual  examination  as  of 
December  31,  the  following: 

(1)  A  credit  balance  in  the  cash  account  of $625.00 

(2)  In  the  credit  ledger  a  debit  balance  for  cash 

charged  to  Davis  &  Co.  on  July  31  for 375.00 

(3)  In  the  debit  ledger  a  credit  balance  for  cash 

paid  by  Jones  &  Co.  on  December  31 250.00 

(4)  A  debit  balance  also  in  the  debit   ledger  to 

Winslow  &  Co.: 

July      1,  Mdse $50.00  Aug.  20,  Cash  &  discounts  $50.00 

Aug.     3,  Mdse 60.00  Oct.  3,     "                "            75.00 

Sept.   15,  Mdse 75.00  Dec.  1,     "                "          100.00 

Oct.    10,  Mdse lOO.OO  Dec.  31,  Balance 60.00 

December  31,  Balance.. .  .$60.00 

What  would  be  your  views  of  each  of  these  items  ? 


ILLINOIS 


165 


Question  518 

A  company  insures  the  life  of  its  manager  for  its  own 
benefit  in  the  sum  of  $50,000,  the  annual  premium  being 
$1,250.  Explain  the  method  you  would  adopt  of  treating 
the  disbursement  at  the  annual  accounting  during  the 
period  the  policy  was  in  force. 

Question  519 

How  far  is  an  auditor  entitled  to  probe  into  matters 
beyond  the  term  which  he  is  instructed  to  audit,  and  for 
what  purpose  should  he  do  so? 

Question  520 

In  the  course  of  audit  of  an  investment  and  brokerage 
corporation  you  find  that  the  directors  have  written  up  the 
value  of  some  of  the  securities,  which  they  contend  is  in 
harmony  with  current  market  values.  The  accounts  show 
that  the  dividend  proposed  to  be  paid  has  not  been  earned 
unless  the  increment  in  value  referred  to  is  included  as  a 
profit.  What  is  your  view  of  the  proposed  procedure  of 
the  directors?  If  you  concur  with  their  proposed  action, 
state  your  reasons;  and  if  not,  state  the  procedure,  as 
auditor,  you  would  follow. 

'Question  521 

(a)  In  the  accounts  of  a  wholesale  dry-goods  company, 
under  what,  if  any,  circumstances  is  it  permissible  to  carry 
forward  to  a  subsequent  period  the  whole  or  any  portion 
of  the  expenditures  for  salesman's  salaries  or  commissions 
and  traveling  expenses. 

(b)  In  the  accounts  of  a  lumber  company  owning  large 
tracts  of  standing  timber,  how  should  the  book  value  of 
"Stumpage"  be  disposed  of?  What  do  you  understand  by 
"Stumpage"? 


NEW  JERSEY 


Question  522 

The  general  business  public  frequently  makes  no  distinc- 
tion as  between  a  bookkeeper  and  an  accountant.  What  is 
the  distinction  ?    Define  in  your  own  words : 

(a)  A  bookkeeper 

(b)  An  accountant 

(c)  An  auditor 

(d)  A  practicing  public  accountant  and  auditor 

Question  523 

A  business  man  sends  for  you  and  talks  to  you  thus: 
"I  want  my  books  and  accounts  examined.  I  am  informed 
and  believe  them  to  be  all  right,  but  I  want  to  be  assured  of 
it  beyond  doubt.  I  also  want  to  know  the  condition  of  my 
business,  as  the  books  show  the  same,  at  this  date.  I  also 
want  to  know  if  the  business  has  made  money  or  lost 
money,  and  in  either  case  what  amount.  What  will  the 
*job'  cost  me,  and  how  long  will  it  take  to  find  out  ?" 

(a)  How  would  you  deal  with  such  a  case? 

(b)  What  would  you  require  to  have  furnished  to  you 
so  that  you  could  ascertain  the  facts  wanted  ? 

Question  524 
Good-will : 

(a)  What  is  good-will? 

(b)  What  part  does  it  play  in  corporations? 

1 66 


NEW  JERSEY  167 

Question  525 
Three  gentlemen  have  been  associated  as  partners  in  a 
certain  manufacturing  enterprise.  At  the  close  of  the  year 
they  desire  an  honest  and  fair  adjustment  of  the  result  and 
division  of  the  resulting  gains.  They  have  agreed  to  abide 
by  your  decision.     They  furnish  you  the  following  facts : 

(1)  Anderson,   Brown  &  Cristy  are  equal  partners 

in  a  manufacturing  enterprise. 

(2)  Each  partner  to  receive  6%  interest  on  his  aver- 

age investment. 

(3)  Cristy,  as  superintendent,  to  receive  yearly  sal- 

ary of  $3,000. 

(4)  Brown  keeps  a  general  store,  at  which  the  oper- 

atives deal,  and  Brown  has  agreed  to  allow 
Anderson  and  Cristy  5%  on  his  sales  to  the 
operatives. 

(5)  Brown's   sales   to   the   operatives   amounted   to 

$1,575. 
(^)   Anderson  to  receive  for  his  services  as  selling 
agent  10%  on  the  net  profits  as  existing  be- 
fore his  percentage  is  taken. 

(7)  Anderson's  average  investment  for  the  year  is 

$9,750. 

(8)  Brown's    average    investment    for   the   year   is 

$5,750. 

(9)  Cristy's    average    investment    for    the    year    is 

$5,000. 
(10)   Leaving  out  the  interest,  salary,  and  Anderson's 
and  Cristy's  percentages,  the  net  gain  for  the 
year  is  $15,000. 
What  share  of  the  $15,000  is  each  partner  entitled  to? 
Prepare  a  sheet  that  will  show  under  separate  heads : 
Accounts,  with  items,  of  Anderson,  Brown,  Cristy. 
Distribution  of  the  gain. 


MICHIGAN 


Question  526 

What  IS  the  general  course  for  an  accountant  to  follow 
when  called  upon  to  audit  the  books  of  any  business?. 

Question  527 

How  would  you  classify  the  accounts  in  preparing  a 
statement  of  the  following : 

(a)  Gas  and  electric  light  company? 

(b)  Electric  railroad? 

(c)  A  manufacturing  business? 

Question  528 

Should  depreciation  be  written  off  the  accounts  of  a 
corporation  whose  property  is  of  a  wasting  nature,  such  as 
a  quarry  or  a  mine?    Give  reasons. 

Question  529 

The  J.  B.  &  B.  Coal  Company  has  acquired  a  leasehold 
right  to  a  certain  area  of  coal,  and  also  owns  a  freehold 
coal.  What  would  you  require,  as  auditor,  to  satisfy  your- 
self that  revenue  was  bearing  its  proper  annual  charge  in 
respect  of  the  coal  mined? 

Question  530 

Chart  the  following  accounts  of  a  street  railway  com- 
pany under  their  proper  classification  and  logical  order,  as 
to  the  assets  (active,  fixed,  and  passive),  liabilities  (funded, 
floating,  reserves  and  capital),  expenses    (transportation, 

1 68 


MICHIGAN 


169 


including  operating  of  power  plant  and  car  service), 
(general,  including  administrative,  emergencies,  and  fixed 
charges),  (maintenance,  including  repairs  and  deprecia- 
tion), and  revenue,  (a)  from  operations  and  (b)  from  other 
sources. 

Organization  expenses,  preliminary  engineering  and 
superintendence,  right  of  way,  track  and  roadway,  notes 
payable,  cash  in  office,  profit  and  loss,  power  plant  wages, 
salaries  of  general  officers,  damages,  taxes,  electric  line,  in- 
vestment real  estate,  debentures,  vouchers  payable,  stocks 
and  bonds  of  other  companies,  hired  power,  wages  of  conduc- 
tors and  motormen,  car  service  supplies,  insurance,  first  mort- 
gage bonds.  Ninth  National  Bank,  cleaning  and  sanding 
track,  printing  and  stationery,  legal  expenses,  rent  of  land 
and  buildings,  notes  receivable,  shop  tools  and  machinery, 
passenger  receipts,  rolling  equipment,  dividends,  material 
and  supplies,  freight  receipts,  interest  on  deposits,  track 
rentals,  common  stock,  sinking  funds,  good-will,  mail  re- 
ceipts, sale  of  power,  dividends  on  securities,  salaries  of 
clerks,  removal  of  snov/  and  ice,  advertising  and  attrac- 
tions, storeroom  expenses,  steam  plant,  items  in  suspense, 
impairment  and  surplus,  first  preferred  stock,  repairs  to 
equipment,  reserves,  accounts  receivable,  second  preferred 
stock,  second  mortgage  bonds,  fuel  and  water  for  power 
buildings,  and  fixtures. 

Question  531 

A  $100  bond  is  issued  at  $115  and  is  payable  as  to  $35 
on  allotment,  and  to  the  remaining  $80,  in  four  equal  instal- 
ments at  intervals  of  two  months,  the  first  instalment  being 
due  two  months  after  the  allotment.  If  after  a  year  a  divi- 
dend of  $6  is  paid  on  each  bond,  what  is  the  average  rate  of 
interest  on  the  investment  for  the  whole  year  ? 


lyo  C.    P.    A.    AUDITING    QUESTIONS 

Question  532 

John  Adams,  a  capitalist,  contemplates  purchasing  the 
stock  of  the  American  Grain  Exporting  Company,  a  cor- 
poration organized  with  a  capital  of  $200,000,  divided  into 
1,000  shares  preferred  stock  and  1,000  shares  common 
stock,  par  value  $100  each;  6%  dividends  payable  upon  the 
preferred  stock  before  any  dividends  are  declared  upon  the 
common  stock. 

This  stock  has  been  offered  to  Mr.  Adams  at  $60  per 
share  for  the  preferred  and  $40  per  share  for  the  common. 

You  are  requested  to  audit  the  books  of  the  company 
and  give  your  opinion  as  to  the  value  of  the  stock.  You 
find  the  following  accounts  to  be  correct,  covering  a  period 
of  one  year : 

Cash   $900.00 

Accounts  receivable: 

Good  $15,000.00 

Doubtful  4,000.00 

Bad 6,000.00        25,000.00 

Plant  and  machinery 75,000.00 

Horse  and  wagons 4,000.00 

Merchandise — inventory 29,000.00 

Good-will  50,000.00 

Furniture  and  fixtures 2,000.00 

Expenses  3,000.00 

Wages  15,000.00 

Purchases  325,000.00 

Claims  and  rebates , 8,000.00 

Ordinary  repairs 9,000.00 

Sales  $260,400.00 

Mortgage  on  plant 25,000.00 

Accounts  payable 42,000.00 

Surplus    18,500.00 

Capital  stock 200,000.00 

Totals $545,900.00    $545,900.00 


MICHIGAN  lyi 

Inventory  submitted,  $129,000.  The  company  started 
business  six  years  ago  and  built  the  plant  and  machinery 
and  purchased  the  property  pertaining  to  fixed  capital. 
Write  the  report,  commenting  upon  the  advisability  of  the 
purchase,  and  submit  profit  and  loss  statement  and  balance 
sheet,  after  closing  books. 

Question  533 

The  cashier  of  a  firm  has  disappeared.  The  cash  book 
is  left  written  up  and  balanced  off,  the  custom  being  to  pay 
any  cash  balance  into  the  bank  each  day.  What  course 
would  you  take  to  ascertain  whether  there  were  any  defal- 
cations, if  you  were  called  upon  to  audit? 

Question  53J/- 

What  is  the  average  date  of  the  following:  (a)  $114 
due  April  10;  $140  due  April  26;  $320  due  May  22;  $976 
due  June  6?  (b)  June  3,  $375  on  30  days'  time;  June  28, 
$420  on  60  days'  time;  July  16,  $560  on  four  months'  time; 
September  4,  S228  on  90  days'  time?  (c)  Dr.  May  16, 
$437,  Cr.  May  23,  $400;  Dr.  May  31,  $324,  Cr.  June  16, 
$300? 

Question  535 

(a)  If  instructed  to  carry  out  a  monthly  audit  by  the 
auditing  committee  of  a  club,  what  steps  would  you  take  to 
ascertain  whether  any  speculations  by  the  servants  or  stock 
clerks  were  being  carried  on  in  connection  with  the  kitchen 
and  cafe? 

(b)  What  system  would  you  recommend  to  prevent 
dishonesty  on  the  part  of  the  various  employees,  from  the 
time  orders  are  placed  for  buying  the  provisions  and  sup- 
plies, until  the  accounts  of  members  are  paid  to  the  cashier 
and  banked? 


1^2  C.    P.    A.    AUDITING    QUESTIONS 

Question  5S6 

(a)  A  man  invests  $2,000  in  3%  stock  at  84,  and  $5,000 
in  4%  at  96.  After  three  years  he  sells  the  former  at  72, 
and  the  latter  at  101.  What  rate  of  interest  has  he  received 
during  the  three  years  on  his  investment?  (b)  And  to  vi'hat 
extent  has  the  value  of  his  capital  changed?  Show  by 
figures  how  you  worked  out  the  answers. 

Question  537 

An  American  firm  has  an  extensive  trade  with  Spanish 
and '  English  customers,  to  whom  goods  are  invoiced  in 
Spanish  and  English  currency,  and  payments  are  accepted 
made  by  bills  in  those  countries.  This  firm's  principal 
business  is,  however,  in  the  United  States.  Explain  in 
what  manner  you  would  arrange  the  books  to  be  kept,  and 
the  titles  of  any  special  accounts  that  might  be  necessary  to 
keep. 

Question  538 

Jones  and  Brown  are  partners,  sharing  profits  equally. 
Their  capital  as  it  appears  on  the  books  of  the  partnership 
on  the  date  they  dissolve  partnership  is :  Jones,  $2,000,  and 
Brown,  $500.  The  total  amount  owing  by  the  firm  is 
$5,000,  which  includes  $1,000  due  to  Jones  on  a  loan,  and 
$500  due  to  Brown  on  a  loan.  The  whole  of  the  assets  of 
the  firm  realize  $6,000.  Prepare  your  own  accounts  and 
supply  details  for  closing  up  the  partnership,  showing  the 
position  in  which  the  partners  stand  with  each  other. 

Question  539 

How  would  you  deal  in  a  life  insurance  company's  ac- 
counts with  premiums  received,  bearing  in  mind  the  fact 
that  premiums  are  always  paid  in  advance?  Should  you 
apportion  them?     Explain  fully  in  your  answer. 


MICHIGAN  173 

Question  6^0 

A  certain  issue  of  $100,000  4%  bonds  is  dated  Septem- 
ber 1,  1908,  and  interest  begins  at  that  date,  but  interest  is 
payable  on  February  1  and  August  1,  and  the  principal 
(with  four  months'  interest)  is  payable  December  1,  1912. 
What  is  the  value  of  these  bonds  on  a  3.60  basis  at  the  date 
of  issue?  What  is  their  value  at  the  same  basis  if  pur- 
chased on  December  1,  1908?  (Note  that  you  are  inter- 
polating into  a  five-month  period,  not  a  six-month,  in  the 
beginning.) 

Question  5J/-1 

An  ice  company  sells  coupon  books  which  are  paid  for 
in  advance.  What  accounts  would  be  required  for  the  pur- 
pose of  correctly  auditing  the  sales  and  deliveries  in  order 
to  determine  the  exact  earnings  at  any  given  time? 

Question  5J^2 

What  do  you  understand  is  the  purpose  of  the  Com- 
mission on  Economy  and  Efficiency  appointed  by  President 
Taft? 

Question  5JfS 

Give  the  arguments  for  and  against  figuring  interest  on 
a  manufacturing  investment  as  a  part  of  the  cost  of  pro- 
duction. 


Question  54 


In  auditing  a  business,  you  find  that  the  market  value 
of  securities  owned  by  it  has  depreciated  during  the  year  to 
an  amount  equal  to  the  earnings  of  the  business  proper.  In 
making  your  report  how  would  you  treat  that  situation? 


174  C.    P.    A.    AUDITING    QUESTIONS 

Question  5^5 

If  you  were  appointed  auditor  of  a  club,  such  as  the 
Fellowcraft  Club,  in  which  receipts  are  from  dues  and  cafe 
services,  what  method  would  you  prescribe  for  keeping  the 
accounts  so  that  you  might  be  able  to  make  a  check  upon 
the  goods  side  of  the  institution? 


FLORIDA 


Question  5J/-6 

A  company  is  organized  in  New  York  to  lend  money  on 
real  estate  mortgages  in  Florida. 

What  examination  should  an  auditor  make  of  such 
mortgages,  and  how  would  he  guard  against  duplicate  mort- 
gages on  the  same  property? 

Question  5Jt-7 

A  new  company  sells  some  of  its  property  at  a  premium. 
State  how  these  premiums  should  appear  in  the  accounts. 

Question  5^8 

Suppose  you  had  certified  the  balance  sheet  of  a  manu- 
facturing concern,  and  were  asked  by  a  stockholder  why 
you  had  certified  it  as  correct  when  some  of  the  assets  were 
not  salable  at  the  figures  placed  against  them,  what  reply 
would  you  make  ? 

Question  5Jf9 

A  firm  has  been  doing  business  for  you  ten  years,  during 
which  time  no  audit  has  been  made  and  nothing  has  been 
charged  off  on  account  of  bad  debts.  There  are  six  hun- 
dred accounts  on  the  ledger. 

State  how  you  would  verify  and  classify  them. 

175 


176  C.    p.    A.    AUDITING    QUESTIONS 

Question  550 

Give  your  opinion  as  to  the  advantages,  or  disadvan- 
tages, of  bound  and  of  loose-leaf  ledgers ;  and  give  at  least 
two  methods  for  preventing  improper  abstracting  of  leaves 
from  loose-leaf  books. 

Question  551 

In  auditing  a  large  concern,  such  as  a  mining  company 
operating  a  number  of  distinct  plants,  how  should  you 
satisfy  yourself  that  the  following  items  were  properly  ac- 
counted for  and  safeguarded  ? — 

(1)  Advances  on  pay-rolls,  both  cash  and  merchan- 

dise. 

(2)  Unclaimed  wages. 

(3)  Purchases  which  are  made  by  one  purchasing 

agent  for  all  the  plants. 

Question  552 

On  certain  lines  of  business  (e.g.,  real  estate  companies, 
sewing  machine  agencies,  retail  furniture  houses),  a  large 
portion  of  the  sales  are  made  on  the  instalment  plan,  and  at 
the  close  of  any  period  a  large  number  of  such  transactions 
may  be  uncompleted. 

How  should  the  profits  from  such  uncompleted  sales  be 
treated  in  the  balance  sheet  ? 

Question  553 

Define  secret  reserves,  and  state  the  duties  of  an  auditor 
in  connection  therewith. 

Give  your  opinion  as  to  the  advantages  or  dangers 
arising  from  such  reserves. 


FLORIDA  177 

Question  55Jf 

While  examining  a  bank,  you  find  that  many  indorsed 
notes  have  been  extended  beyond  their  original  dates. 

Is  such  a  good  practice?  Name  at  least  two  methods 
for  guarding  against  any  danger  arising  from  it. 

Question  555 

In  auditing  the  accounts  of  a  business  where  accounts 
receivable  are  kept  in  a  sub-ledger,  with  a  proper  controlling 
account  in  the  general  ledger,  give  your  opinion  as  to  the 
extent  to  which  the  sub-ledger  should  be  checked,  under 
various  circumstances. 

Question  556 

How  would  you  show  in  your  report  of  an  audit  you 
had  made,  fluctuations  in  the  value  of  the  following  securi- 
ties owned  by  the  concern : 

(a)  Real  estate 

(b)  Stocks  and  bonds 

(c)  Material  on  hand 

In  some  cases  the  present  prices  are  higher;  and  in 
some  they  are  lower  than  when  the  securities  were  bought. 
State  your  idea  of  the  general  principles  governing  such 
variations. 

Question  557 

You  are  consulted  by  a  wholesale  grocery  house  whose 
accounts  are  supposed  to  be  kept  by  double  entry,  and  are 
asked  to  examine  the  record  of  the  chief  bookkeeper  who 
also  acts  as  cashier  and  who  is  suspected  of  dishonesty.  He 
has  been  in  charge  for  six  months ;  the  cash  book,  journals, 
and  ledger  appear  to  have  been  kept  day  by  day,  but  the 


lyS  C.    P.    A.    AUDITING    QUESTIONS 

general  ledger  has  at  no  time  been  in  balance,  nor  do  the 
customers  ledgers  balance  with  the  controlling  account  in 
the  general  ledger. 

The  volume  of  business  is  large  and  there  are  1,500 
open  accounts  in  the  customers  ledger. 

State  fully  what  steps  you  would  take. 

Question  558 

On  closing  the  audit  of  a  year's  business  you  find  that 
many  items  under  "Accounts  Receivable"  are  of  long  stand- 
ing. State  what  special  examination  you  would  make  of 
these  to  determine  their  value,  and  what,  if  any,  remarks 
you  would  make  thereon  in  your  report. 

Should  the  treasurer,  or  other  officer,  object  to  the 
amount  you  wish  to  write  off  or  to  provide  for  by  a  re- 
serve account,  what  would  your  action  be? 

If  on  a  second  audit,  a  year  later,  you  find  that  many 
of  the  same  items  still  remain  unchanged,  what  action  would 
you  take? 

Question  559 

When  auditing  at  the  end  of  its  first  year's  business  the 
accounts  of  a  land  development  company,  organized  for  the 
purpose  of  buying,  developing,  and  selling  lands,  state  what 
books  and  documents  you  would  require  to  complete  your 
work. 

Question  560 

In  auditing  a  hotel  managed  on  the  European  plan, 
where  proper  accounts  are  kept  and  perpetual  inventories 
of  stores  on  hand  are  maintained,  what  form  of  monthly 
statements  would  you  suggest,  especially  in  connection  with 
the  operation  of  the  dining  room  and  wine  room? 


FLORIDA  179 

Question  561 

Give  the  general  duties  of  the  auditor  of  a  corporation 
in  this  country,  compare  them  with  the  same  duties  in  Eng- 
land, and  give  your  comments  on  the  differences  between 
the  two  systems. 

Question  562 

You  are  engaged  to  audit  the  books  and  accounts  of  a 
concern  after  the  books  have  been  closed  and  the  balance 
sheet  and  profit  and  loss  statement  have  been  prepared,  and 
you  find  the  following  items  are  included  in  the  profit  and 
loss  statement : 

Increase  in  value  of  stocks  held $1,000 

Increase  in  value  of  real  estate  held 10,000 

Profit  from  sale  of  the  company's  treasury  stock..  1,200 

Profit  from  sale  of  real  estate 5,000 

Profit  from  stocks  and  bonds  sold 800 

Criticize  these  entries,  and,  if  you  think  them  erroneous, 
state  how  you  would  correct  them. 

Question  563 

Give  in  detail  a  method  for  verifying  the  payment  of 
interest  on  coupons  from  bonds  of  a  company  you  are 
auditing,  and  state  how  proof  of  such  payments  should  be 
presented  to  you. 

Question  56^ 

In  auditing  the  accounts  of  a  merchandise  broker,  how 
would  you  verify  his  statement  of  brokerage  due  to  him 
from  the  houses  for  whom  he  sells  ?  Supposing  that  many 
of  these  items  were  on  shipments  not  made  at  the  time  of 
the  audit,  how  would  you  treat  them  in  your  statement  of 
assets  ? 


l8o  C.    P.    A.    AUDITING    QUESTIONS 

Question  665 

You  are  called  in  to  audit  the  accounts  of  a  mercantile 
corporation  and  find  that  the  market  value  of  its  real  estate 
holdings  has  greatly  enhanced.  Previously  it  has  been  car- 
ried on  the  books  at  cost.  The  managing  director  now  asks 
that  there  be  added  to  the  Real  Estate  account  an  amount 
sufficient  to  represent  its  increased  value. 

Would  you  consent  to  this  and,  if  so,  how  would  you 
show  the  increase  in  preparing  the  profit  and  loss  account 
and  balance  sheet? 

He  also  wishes  to  add  to  the  Real  Estate  account  in- 
terest paid  on  money  borrowed  to  pay  for  it.  Is  this  right? 
Supposing  it  to  be  right,  how  would  you  show  it  in  pre- 
paring your  profit  and  loss  account  and  balance  sheet? 
Would  your  answer  be  changed  if  the  concern  were  one 
buying  and  selling  real  estate  exclusively? 

Question  666 

As  to  inventories : 

Describe  what  you  consider  the  correct  attitude  of  an 
auditor  regarding  inventories  generally,  and  especially 
when  preparing  a  balance  sheet  for  a  bank : 

Real  estate  company 
Wholesale  grocer 
Orange  grove 
Steamboat  company 

Question  667 

Describe  a  perpetual  inventory,   its  advantages  and 
disadvantages,  for  each  of  the  above  businesses. 

Question  568 
You  are  called  in  to  audit  the  books  of  the  Fla.  Land  & 


FLORIDA  l8i 

Homeseekers  Co.,  a  corporation  capitalized  at  $250,000; 
the  par  value  of  the  stock  is  $100  per  share. 

Among  other  ledger  accounts,  you  find  accounts  with 
balances  as  follows : 

Capital  stock Cr.  $250,000.00 

Treasury  stock Dr.       25,000.00 

An  examination  of  the  stock  certificate  book  shows  you 
that  certificates  in  the  amount  of  $15,000  have  been  issued. 
Reference  to  the  subscription  record  informs  you  that 
stock  in  the  sum  of  $225,000  has  been  sold  and  charged  to 
the  ledger  accounts  of  the  various  subscribers.  You  find 
that  $45,000  has  been  credited  to  these  accounts  for  cash 
paid  in.  The  by-laws  provide  that  no  certificates  shall  be 
issued  except  for  fully  paid  stock.  You  find  that  the  com- 
pany has  in  its  safe  $5,000  worth  of  certificates  of  its  own 
stock  which  it  has  bought  back  from  subscribers  whose 
ledger  accounts  have  been  cre'dited  for  the  amount.  The 
company  has  not  begun  to  do  business  yet  and  no  transac- 
tions other  than  those  mentioned  have  taken  place.  Draw 
the  company's  balance  sheet,  giving  your  reasons  for  the 
results  shown  therein. 

Question  569 
Define  and  differentiate  between : 

(a)  Debenture  bond 

(b)  Mortgage  bond 

Question  570 

Your  clients  send  you  the  annual  profit  and  loss  account 
of  a  wholesale  grocery  house  that  sells  about  three  millions 
a  year.  Your  clients  ask  that  you  advise  them  whether  or 
not  the  profits  shown  for  that  year  are  correct.    Your  time 


l82  C.    p.    A.    AUDITING    QUESTIONS 

is  limited,  and,  therefore,  you  are  unable  to  make  a  detailed 
audit  of  the  books  to  ascertain  whether  the  profit  and  loss 
account  submitted  to  you  is  correct  or  not.  What  method 
would  you  follow  to  ascertain  the  approximate  correctness 
of  the  account  submitted  to  you?  Describe  in  detail  what 
your  operations  would  consist  of. 

Question  571 

A  municipal  board  built  a  number  of  new  buildings 
during  the  last  year,  buying  its  own  material  and  paying 
its  foremen  and  carpenters  by  the  day.  You  are  told 
that  one  of  the  buildings  cost  much  more  relatively  than 
the  others,  without  apparent  reason,  and  you  are  asked  to 
submit  a  plan  which  will  determine  the  facts  in  the  case  and 
locate  abnormal  charges. 

What  plan  would  you  suggest? 

Question  572 

You  are  called  in  to  audit  the  accounts  of  the  S.  P. 
Brown  Co.,  a  corporation,  at  the  close  of  its  first  business 
year.  The  company  began  business  Jan.  1,  1912.  You 
find  the  following  trial  balance  on  the  bookkeeper's  desk : 

Cash  $895.00 

Capital    stock $50,000.00 

Accounts  receivable 35,000.00 

Accounts  payable 47,450.00 

Bills  payable 10,000.00 

General  expenses 27,842.85 

Salaries    4,644.29 

Sales  127,402.95 

Purchases   104,948.51 

Furniture  and  fixtures 5,943.43 

Cost  of  charter 375.00 

Real  estate 55,203.87 

$234,852.95  $234,852.95 


FLORIDA 


183 


You  find  that  the  General  Expenses  account  includes  the 
following  items : 

Commissions  paid  for  selling  capital  stock $5,742.00 

Compiling  a  list  of  possible  customers  for  cir- 
cularizing purposes  (the  list  was  only  com- 
pleted and   ready  for  use  by  the   end  of  the 

year)   3,000.00 

Insurance 542.97 

License    457.84 

Office   supplies 400.00 

The  balance  of  the  account  represents  freight  on  pur- 
chases. 

The  unexpired  insurance  is  $22.65. 

The  unexpired  license  is  $271.48. 

It  is  desired  to  make  the  profits  show  up  as  well  as  pos- 
sible consistent  with  the  truth.  It  is  not  desired  to  write 
off  anything  for  depreciation. 

You  find  that  the  Real  Estate  account  includes : 

Taxes  to  the  amount  of .$      947.84 

Merchandise  inventory ...    10,454.92 

Draw  the  balance  sheet. 

Question  573 

Doe  &  Co.  allow  their  bookkeeper  to  sign  all  checks. 
In  verifying  the  bank  account  as  it  appears  in  their  ledger 
you  find  that  after  allowing  for  outstanding  checks  the 
ledger  balance  agrees  with  the  balance  shown  by  the  bank 
pass  book.  You  find,  however,  a  credit  in  the  ledger  of 
$1,000,  and  upon  looking  up  the  journal  reference  find  this 
entry : 

Profit  and  loss  to  bank.  .$1,000.00     $1,000.00 
with  no  explanation.     You  find  no  cancelled  check  to  ac- 
count for  this  entry,  and  upon  examining  the  bunch  of  can- 
celled checks  returned  by  the  bank  you  find  that  they  total 


l84  C.    P.    A.    AUDITING    QUESTIONS 

$1,000  less  than  the  amount  actually  paid  by  the  bank  as 
shown  by  the  pass  book.  What  is  the  implication  and  how- 
would  you  verify  it? 

Question  57 Jf- 

You  are  engaged  to  certify  to  a  balance  sheet  of  a  whole- 
sale grocer,  and  to  make  such  further  audit  as  you  may  con- 
sider necessary  as  the  work  progresses. 

Write  such  a  report  and  certificate  as  you  would  render 
after  having  completed  the  work  and  found  some  auditing 
necessary  {e.g.,  in  connection  with  salesmen's  accounts), 
bearing  in  mind  that  your  certificate  will  be  read  by  persons 
unacquainted  with  the  exact  instructions  given  you  or  with 
the  details  of  the  business. 

Question  575 

In  auditing  the  accounts  of  a  company  you  find  that  no 
depreciation  has  been  charged  against  its  plant  and  ma- 
chinery but  all  repairs  have  been  charged  against  revenue. 
You  find  that  the  land  upon  which  the  buildings  and  ma- 
chinery of  the  company  stand  has  greatly  enhanced  in  value 
and  that  nothing  showing  this  has  been  placed  on  the  books. 

How  would  you  handle  this  situation? 

Question  576 

(a)  The  bookkeepers  of  Jacksonville  Mercantile  Co.  find 
that  accounts  receivable  as  taken  from  the  ledgers  amount 
to  $14.50  more  than  the  balance  shown  by  the  controlling 
account.  There  are  5,000  open  accounts.  The  bookkeepers 
have  been  checking  back  for  weeks  in  the  effort  to  locate  the 
difference,  but  have  given  up  in  despair.  You  are  engaged 
to  locate  it.    Formulate  your  plans. 

(b)  What  method  would  you  adopt  to  verify  the  cor- 
rectness of  Accounts  Receivable,  Bills  Receivable,  Accounts 
Payable,  and  Bills  Payable? 


COLORADO 


Question  577 

What  plan  would  you  suggest  to  minimize  the  risk  of 
fraud  in  the  following : 

Pay-rolls  ? 

Accounting  of  cash  receipts? 

Invoices  of  purchases? 

Question  578 

State  with  reasonable  fullness  (not  less  than  800  words) 
the  various  steps,  the  details  and  objects  therein,  in  the  audit 
of  one  of  the  following  classes  of  audits : 

A  bank. 

Wholesale  mercantile  house.  (Specify  nature  of  busi- 
ness.) 

County  treasurer's  office  (Colorado). 

City  clerk's  office,  where  the  clerk  is  the  collecting 
officer,  except  of  taxes,  which  are  paid  to  him  by 
the  county  treasurer. 

Question  579 

Under  what  circumstances  can  a  bookkeeper  cover  up 
forced  footings  and  postings  during  the  course  of  the  audit, 
so  that  ordinarily  you  would  not  detect  the  same,  unless 
certain  precautions  are  taken?  State  what  these  precau- 
tions should  be. 

185 


l86  C.    P.    A.    AUDITING    QUESTIONS 

Question  580 

(a)  Of  what  use  can  the  various  items  of  "Checks" 
listed  on  deposit  tickets  be  in  an  audit  ? 

(b)  Under  what  circumstances  will  the  same  prove  to 
be  of  no  value  ? 

Question  581 

(a)  State  what  points  you  would  observe  in  the  auditing 
of  vouchers  covering  disbursements. 

(b)  State  your  method  and  procedure  in  an  audit,  in 
determining  that  you  have  seen  all  vouchers,  even  though 
some  of  them  have  been  credited  to  personal  accounts,  and 
payments  have  been  made  to  "apply  on  account." 

Question  582 

After  completion  of  the  audit  which  you  described  in 
question  No.  578,  state  what  matters  you  would  refer  to  in 
the  diction  of  your  report,  and  what  schedules  you  would 
show  in  support  of  the  audit  made. 

Question  58S 

State  where  you  feel  that  your  duty  ends  in  the  correc- 
tion of  errors  located  during  an  audit  after  the  books  are 
closed. 

Question  58^ 

Upon  beginning  the  work  of  an  audit  of  a  company 
whose  business  and  the  conduct  of  the  same  are  compara- 
tively unknown  to  you,  how  would  you  proceed,  and  what 
general  precautions  would  you  take?  Give  a  brief  outline 
of  how  you  would  spend  the  first  day  or  two. 

Question  585 

What  points  in  an  audit  are  to  be  observed  in  the  veri- 
fication of  notes  receivable  held  as  securities? 


OHIO 


Question  586 

State  the  proper  treatment  of  the  following  accounts  in 
determining  the  profit  or  loss  of  a  business  for  a  specific 
time: 

(a)  Insurance  Premiums  Paid 

(b)  Doubtful  Accounts  Receivable 

(c)  Interest   Accrued   on   Notes  and   Accounts   Re- 

ceivable 

(d)  Interest  Accrued  on  Notes  and  Accounts  Pay- 

able 

(e)  Contingent  Claims  for  Personal  Injuries 

(f)  Depreciation 

Question  587 

A  sale  company  has  completed  a  manufacturing  plant, 
the  machinery  and  equipment  cost  being  $250,000.  It  is 
assumed  that  because  of  the  nature  of  the  business  the  entire 
machinery  and  equipment  will  have  to  be  replaced  every 
several  years.  In  such  a  case  how  would  you  recommend 
that  current  repair  and  maintenance  charges  should  be 
handled  ? 

Question  588 

In  making  an  audit  in  which  you  have  the  right  to  make 
correcting  entries  on  the  books  of  the  company,  how  would 
you  require  the  following  items  to  be  charged — Capital 
account  or  Revenue  account  ? — 

187 


l88  C.    P.    A.    AUDITING  QUESTIONS 

,(a)  Premium  given  for  lease 

(b)  Cost  attending  giving  of  mortgage 

(c)  Commission  paid  for  selling  capital  stock 

(d)  Brokerage  on  purchase  of  investment 

(e)  Accrued  interest   or  dividends   included   in  the 

cost  price  of  an  investment 

(f)  Preliminary    and    organization    expense    in    the 

formation  of  the  company 

(g)  Insurance  premiums  paid  in  advance 

(h)   Cost  of  replacing  an  old  machine  with  a  new 

machine  of  greater  value 
(i)    Premium  paid  on  the  purchase  of  a  security 

Question  589 

(a)  You  are  called  upon  to  audit  the  books  of  account 
of  a  concern,  and  discover  that  for  the  fiscal  year  under 
your  inspection  it  has  not  shown  sufficient  profit  to  justify 
the  payment  of  any  dividends.  The  manager,  in  order  to 
make  a  profit  showing,  has  failed  to  set  up  the  usual  re- 
serves for  depreciation  of  buildings,  plant,  machinery,  tools, 
etc.,  nor  has  he  sufficiently  allowed  for  losses  in  the  collec- 
tion of  accounts  receivable,  etc.  In  making  your  report  of 
audit,  what  would  you  do  under  the  circumstances?  Give 
your  reasons  therefor  fully  in  such  form  as  you  would  sub- 
mit them  in  your  report. 

(b)  In  what  way,  if  at  all,  would  you  report  the  fact 
that  a  trusted  office  manager  had  overdrawn  his  salary  ac- 
count at  various  times,  in  no  case  more  than  $300,  all  of 
which  has  been  returned  before  the  time  of  the  annual 
audit?     State  your  reasons  fully. 

Question  590 
(a)   How  would  you  account  for  the  proceeds  of  sales 
to  customers  without  checking  each  entry? 


OHIO 


189 


(b)  In  passing  upon  the  value  shown  in  the  inventory, 
how  should  the  auditor  treat  materials  costing  $10  per  unit 
when  the  market  price  is  $8  per  unit,  and  when  the  market 
price  is  $12  per  unit  ?    State  reasons  fully. 

Question  591 

Does  an  auditor's  duty  in  any  way  extend  beyond  the 
careful  examination  and  certifying  of  the  books  and  ac- 
counts submitted  to  him  ?    Discuss  briefly  different  theories. 

Question  592 

(a)  The  auditor  of  an  incorporated  company  which 
has  been  accustomed  to  making  investments  in  interest  pay- 
ing securities,  in  making  his  statement  to  the  directors  pre- 
sented a  balance  sheet  showing  a  surplus  of  $65,000.  After 
discussion,  the  directors  determined  they  did  not  wish  to 
declare  a  dividend  out  of  this  surplus  and  gave  their  auditor 
the  following  order: 

''Decrease  this  surplus  by  investing  $50,000  in  the  5% 
bonds  of  the  X  Y  Z  Railroad  Company." 

Presuming  there  was  an  item  in  the  aforesaid  balance 
sheet  of  cash  $75,000,  what  effect  will  the  carrying  out  of 
the  director's  order  have  upon  the  surplus  of  $65,000. 

(b)  What  is  an  audit?    Make  a  definition. 

Question  593 

(a)  What  is  the  difference  between  an  audit  and  an 
investigation  ? 

(b)  What  is  your  understanding  of  a  cash  audit? 

(c)  What  is  your  understanding  of  a  balance  sheet 
audit? 


igo  C.    P.    A.    AUDITING    QUESTIONS 

Question  59^ 

(a)  A  client  consults  you  in  regard  to  auditing  his 
books  and  asks  your  opinion  as  to  the  relative  merits  of  a 
"continuous"  audit  and  a  "completed"  audit.  Explain  the 
advantages  and  disadvantages  of  each. 

(b)  Give  your  views  concerning  the  J)est  methods  of 
auditing  cash  receipts — also  cash  payments. 

Question  595 

If  you  found  that  the  land  of  a  manufacturing  corpora- 
tion had  been  reappraised  at  a  higher  value  than  its  former 
book  value  which  represented  its  cost,  and  such  increase  had 
been  carried  to  profit  and  loss,  what  would  you  do  and  say 
about  it  in  your  report  of  audit  ?  What  if  the  value  had  been 
reduced  ?    State  your  reasons  for  your  action  fully. 

Question  596 

(a)  A  manufacturing  corporation  consigning  its  pro- 
duct to  a  large  number  of  independent  sales  agents  is  some- 
what in  doubt  as  to  how  this  consigned  merchandise  should 
be  accounted  for  on  its  books.  What  method  would  you 
recommend?     Describe  fully. 

(b)  How  may  the  accounts  in  a  trial  balance  be  best 
arranged  to  facilitate  the  preparation  of  a  "Statement  of 
Condition"  ? 

Question  597 

Given  the  following  accounts  appearing  on  the  ledger 
of  a  company  whose  books  you  are  asked  to  audit : 

Accounts  Receivable 

Cash 

Good-Will 

Notes  Receivable 


OHIO  191 

Real  Estate 

Machinery  and  Equipment 

Organization  and  Promotion  Expense 

Inventories 

Accounts  Payable 

Accrued  Interest 

Accrued  Wages 

Notes  Payable 

Mortgage  Bonds 

Capital  Stock 

Sinking  Fund 

Sinking  Fund  Reserve 
Outline  your  method  of  procedure  in  making  a  balance 
sheet  audit,   and  state   what   you  regard  as   necessary   in 
making  such  an  audit. 

Question  598 

Assuming  the  data  is  the  same  as  given  in  the  preceding 
question,  outline  your  method  of  procedure  in  making  a 
"Detailed  Audit"  and  state  to  what  extent  and  how  you 
would  verify  the  different  items  enumerated. 

Question  599 

What  do  you  regard  as  the  proper  method  of  presenting 
a  "Balance  Sheet" ;  that  is,  as  to  form  and  as  to  arrange- 
ment of  the  items  thereon. 

Question  600 

Prepare  a  manufacturing,  a  trading,  and  a  profit  and 
loss  statement  (without  using  figures)  and  include  therein 
the  following  items : 

Insurance  of  factory 

Freight  inward 


ig2  C.    P.    A.    AUDITING    QUESTIONS 

Interest  allowed  on  partners'  capital 

Salesmen's  commissions 

Labor  in  getting  raw  material  from  freight  cars  to 
warehouse 

Cash  discounts  received  from  creditors 

Royalties  paid  for  use  of  patented  process  in  manu- 
facturing 

Returned  sales 

Rent  of  factory- 
Depreciation  of  office  building 

Cash  discounts  allowed  to  customers 

Depreciation  of  machinery 

Freight  outward 

Interest  on  capital  borrowed  to  purchase  machinery 

Allowance  to  customers  for  damaged  goods 

Question  601 

What  would  be  your  method  in  the  preparation  and 
arrangement  of  working  papers  during  an  audit  and  their 
preservation  after  an  audit? 

Question  602 

An  audit  discloses  payments  for  insurance  during  a 
year  to  be  $1,600,  which  is  approximately  a  normal  yearly 
expenditure,  and  the  unexpired  insurance,  unadjusted, 
amounts  to  $600.  No  account  was  raised  for  unexpired  in- 
surance at  the  beginning  of  the  year.  What  adjustment 
should  be  made  on  the  books  and  how  made? 

Question  60S 

Give  auditing  reasons  for  discontinuances  of  a  method 
by  which  petty  disbursements  in  a  manufacturing  concern 
are  made  directly  from  cash  receipts.  Suggest  alternative 
procedure. 


LOUISIANA 


Question  60Jf. 

If  an  appraisal  by  a  recognized  appraisal  company  or 
engineer  is  furnished  you  on  the  properties,  machinery, 
franchises,  etc.,  of  a  client  which  does  not  accord  entirely 
with  your  views,  would  you  accept  figures  as  shown  by  the 
appraisers  or  endeavor  to  establish  your  own  in  making  up 
a  statement  of  condition  at  the  date  of  appraisal?    Why? 

Question  605 

If  asked  to  certify  to  the  correctness  of  a  statement  of  a 
building  and  loan  association,  how  would  you  proceed  to 
prove  correctness  of  Mortgage  Notes,  Paid-up  Stock,  and 
Current  Stock? 

Question  606 
Explain  the  difference  between  cost  and  book  value? 

Question  607 

If  you  are  unable  to  properly  verify  customers'  accounts 
what  would  you  do  ? 


193 


GEORGIA 


Question  608 

In  the  construction  of  a  large  building  the  proprietors 
issue  $800,000  20-year  6%  bonds  which  are  disposed  of 
to  the  contractors  at  85%  of  their  face  value.  You  find, 
upon  examination,  that  the  discount  of  15%  has  been 
charged  to  Construction  account  in  the  first  place,  and  then 
into  Building  account.  State  whether  you  consider  the  final 
entry  legitimate  or  not,  and  give  reasons. 

Question  609 

You  are  elected  the  auditor  of  a  corporation  by  the 
holders  of  both  common  and  preferred  stock,  and  it  is  your 
duty  to  safeguard  the  interests  of  both  classes  of  stock- 
holders. The  preference  stock  bears  7%  and  is  non-cumu- 
lative. Mention  what  precaution  you  would  adopt  to  safe- 
guard the  interests  of  the  preference  shareholders,  giving 
reasons  therefor. 

Question  610 

After  auditing  the  books  of  a  manufacturing  company 
for  a  period  of  ten  years  you  are  asked  to  give  a  certificate 
as  to  the  net  earnings  of  the  business  for  those  ten  years  for 
the  purpose  of  a  sale  based  on  the  earning  capacity  of  the 
property.  What  items  of  expense  heretofore  charged  an- 
nually through  the  Profit  and  Loss  account- may  be  properly 
eliminated  in  the  preparation  of  your  certificate;  and  why? 

194 


GEORGIA  195 

Question  611 

Describe  in  detail  the  method  that  should  be  used  to 
verify  the  securities  representing  the  investments  of  a  com- 
pany under  audit,  in  the  case  of  (a)  real  estate,  (b)  mort- 
gages on  real  estate,  (c)  certificates  of  stock,  (d)  railway 
bonds. 


MISSOURI 


'Question  612 
Outline  the  work  you  would  consider  necessary  in  the 
audit  of  one  of  the  following: 

(a)  Bank 

(b)  Stock  brokers'  accounts 

(c)  Building  and  loan  association 

(d)  Lumber  company 
(c)   Coal  mining  company 

Question  613 

A  corporation  was  formed  to  acquire  certain  assets,  the 
agreed-on  purchase  price  being  $100,000.  It  was  after- 
wards found  that  title  to  some  of  the  assets  could  not  be 
transferred  without  considerable  expense,  and  the  vendor 
agreed  to  an  abatement  of  $10,000.  This  latter  amount  was 
credited  to  a  reserve  fund  and  that  account  was  charged 
with  the  cost  of  perfecting  the  company's  title,  amounting 
to  $6,000.  There  was  also  charged  to  the  account  the  pre- 
liminary expenses  in  the  formation  of  the  company,  and 
the  balance  of  the  account,  amounting  to  $1,000,  was  cred- 
ited to  profit  and  loss.  As  auditor,  would  you  object  to 
these  entries,  and  how  would  you  suggest  they  should  be 
dealt  with,  giving  your  reasons  therefor? 

Question  61^ 

In  the  accounts  of  a  parent  and  subsidiary  company,  it 
is  found  that  the  latter  owes  the  former  a  sum  of  $100,000 

196 


MISSOURI 


197 


on  current  account,  and  $50,000  on  notes  payable.  These 
notes  have  been  discounted  by  the  parent  company.  How 
would  you  treat  the  items  in  consolidating  the  accounts  of 
the  two  companies  ? 

Question  616 

In  the  audit  of  a  company's  accounts  you  find  that  a 
number  of  invoices,  dated  prior  to  the  close  of  the  com- 
pany's financial  year,  have  not  been  taken  up  on  the  books. 
On  inquiry  you  are  informed  that  the  goods  in  question 
have  not  been  inventoried.  Explain  fully  the  grounds  you 
would  advance  against  this  treatment.  If  the  officials  re- 
fuse to  alter  the  accounts,  would  you  consider  it  necessary 
to  mention  the  point  in  your  certificate? 

Question  616 

Under  what  circumstances  would  you  advise  the  con- 
solidation of  the  accounts  of  a  parent  company  with  those 
of  its  subsidiary  companies? 

Question  617 

In  the  case  of  a  controlled  company  whose  assets  and 
liabilities  are  all  consolidated  in  the  balance  sheet  of  the 
parent  company,  how  would  you  treat  in  the  consolidated 
balance  sheet  the  capital  and  surplus  accruing  to  the  mi- 
nority stockholders? 

Question  618 

In  auditing  the  balance  sheet  of  a  railroad  company  as 
at  June  30,  1912,  it  appears  that  the  company  have  included 
amongst  the  general  liabilities  a  dividend  on  preferred  stock 
due  July  15,  1912,  whilst  per  contra  they  have  included 
under  current  assets  the  cash  appropriated  and  deposited 
for  the  dividend.    Do  you  consider  the  treatment  correct  ? 


igS  C.    P.    A.    AUDITING    QUESTIONS 

Question  619 

In  the  preparation  of  the  return  for  corporation  tax 
purposes  for  the  year  1911,  how  would  you  treat  the  in- 
clusion of : 

(a)  Corporation  taxes  estimated   due  for  the  year 

1911? 

(b)  Corporation   taxes   for   the  year    1910   paid   in 

1911? 

Question  620 

Outline  the  programme  of  a  detailed  audit  of  one  of  the 
three  following  companies.  You  are  required  to  certify 
the  balance  sheet  and  profit  and  loss  account. 

(1)  Wholesale  and  retail  dry-goods  store 

(2)  Brass  foundry 

(3)  Electric  light  and  power  company 

Question  621 

After  completing  the  audit  of  a  corporation  for  one 
year  you  have  been  requested  to  furnish  your  client  with 
a  certificate  as  to  the  correctness  of  his  balance  sheet.  Your 
examination,  however,  disclosed  the  following  facts : 

(1)  Owing  to  the  manner  in  which  the  books  have  been 
kept  it  was  impracticable  to  ascertain  the  correctness  of  all 
the  charges  to  the  property  and  fixtures  accounts,  although 
you  have  verified  the  charges  for  the  past  year.  Depre- 
ciation at  proper  rates  has  only  been  written  off  these 
accounts  for  the  year  covered  by  your  audit. 

(2)  Merchandise  valued  at  $50,000  has  not  been  in- 
cluded in  the  inventory,  nor  has  the  corresponding  liability 
been  placed  on  the  books. 

(3)  The    customers'    accounts    receivable    aggregate 


MISSOURI  199 

$200,000,  but  the  collection  of  an  account  of  $50  is,  in  your 
opinion,  doubtful,  and  no  provision  has  been  made  for  same. 

(4)  Customers'  notes  receivable  of  $10,000  were  dis- 
counted with  the  company's  bankers  a  few  days  prior  to  the 
date  of  the  balance  sheet. 

Draft  the  certificate  which  you  would  be  prepared  to 
furnish  to  your  client  as  to  the  correctness  of  his  financial 
statement. 

Question  622 

How  would  you  vouch  the  following  items  and  what 
papers  would  you  examine  in  support  of  these  transactions : 

(1)  Thos.  White  &  Co.,  furniture  purchased $325.00 

(2)  Alex.  Green,  real  estate  for  plant  site 7,500.00 

(3)  American  Sprinkler  Co.,  sprinkler  system  installed..  35,725.00 

(4)  John  Mace,  stumpage  purchased 3,625.00 

(5)  Burns  Trust  Co.,  bonds  purchased  at  par,  $3,000,  less 

commission,  $30 , 2,970.00 

(6)  Machinery  constructed  by  company 10,500.00 

(7)  Alex.  White,  traveling  expenses  for  a  week 37.67 

(8)  Commerce  Bank  Co.,  note  payable  discounted 987.50 

Question  623 

As  a  public  accountant,  you  are  asked  to  prepare  and 
certify  to  the  balance  sheet  of  a  company  at  December  31, 
1913.  The  president  of  the  company  informs  you  that  a 
tentative  balance  sheet,  a  copy  of  which  is  submitted  to  you, 
has  already  been  issued  by  him  to  the  company's  bankers 
and  note  brokers.  He  is  consequently  anxious  that  you 
accept  his  classification  of  assets  and  liabilities.  On  an 
examination  of  the  balance  sheet  the  following  points  come 
to  your  notice : 

(1)  Included  under  Real  Estate,  Plant  and  Equipment, 
is  an  item  of  $25,000,  representing  the  cost  of  certain  un- 
improved real  estate  which  the  company  had  purchased 
five  years  ago,  intending  to  build  a  branch  factory. 


200  C.    P.    A.    AUDITING    QUESTIONS 

(2)  The  accounts  receivable  are  stated  at  $571,435.25, 
an  analysis  of  which  shows  its  composition  to  be  as  follows : 

Customers'    accounts $325,671.10 

Due  by  officers  and  employees 30,131.05 

Capital  stock  subscriptions,  not  fully  paid 175,500.00 

Advance  payments  on  merchandise  purchased..  31,000.00 

Bonds  due  October  31,  1915 9,133.10 

Total $571,435.25 

(3)  The  reserve  for  loss  on  customers'  accounts  is 
shown  as  a  separate  item  on  the  liability  side  of  the  balance 
sheet. 

(4)  The  accounts  payable  of  $301,210.96  include  a 
balance  of  $31,231.35  due  to  a  subsidiary  company. 

State  as  briefly  as  possible  how  you  would  deal  with 
these  items  in  preparing  your  balance  sheet,  and  in  what 
instances  you  would  accept  your  client's  classification. 

Question  62Jlf 

You  are  examining  the  accounts  of  a  corporation  and 
find  that  the  directors  have  not  depreciated  the  buildings, 
machinery,  and  equipment,  on  the  ground  that  the  real 
estate  has  increased.  Draft  a  memprandum  to  the  board  of 
directors,  setting  forth  your  views  and  stating  the  correct 
manner  in  which  the  values  of  these  assets  should  be  re- 
corded on  the  books. 

Question  625 

You  are  auditing  the  accounts  of  the  A.  B.  C.  Paper 
and  Pulp  Company  of  St.  Louis,  at  October  31,  1913,  and 
you  find  that  the  entire  output  of  paper  is  sold  under  con- 
tract to  Smith  &  Co.,  Kansas  City,  at  $43  per  ton  f.o.b. 
Kansas  City,  deliveries  being  made  upon  order  of  purchaser. 


MISSOURI  20I 

This  price  of  $43  per  ton  is  made  up  of  the  following  com- 
ponent parts: 

Cost  of  manufacture,  including  factory  overhead....  $25.00 

Selling  and  administration  expenses 1.00 

Freight — St.  Louis  to  Kansas  City $3.00 

Expenses  of  delivery  to  railroad .50        3.50 

Profit  to  A.  B.  C.  Company 13.50 

Total $43.00 

At  what  figure  would  you  permit  the  A.  B.  C.  Com- 
pany to  inventory  the  paper  on  hand  at  the  date  of  your 
examination?  Please  give  full  explanation  in  support  of 
your  answer. 

Question  626 

You  are  auditor  for  the  Jones  Grocery  Company,  oper- 
ating a  large  store  in  St.  Louis.  After  the  completion  of 
your  last  examination  the  client  has  discovered  that  Smith, 
the  cashier,  had  appropriated  certain  moneys.  Upon  in- 
vestigation, it  was  learned  that  his  practice  had  been  to 
make  checks  in  favor  of  wholesalers.  These  were  duly 
signed  by  Mr.  Jones  and  handed  to  Smith  for  mailing.  Cer- 
tain checks  were  held  out  by  Smith,  the  indorsement  being 
forged.  In  making  the  daily  deposit  for  the  grocery  com- 
pany. Smith  substituted  these  checks  for  currency  which  he 
retained.  It  is  suggested  by  your  client  that  you  were 
guilty  of  negligence  in  not  locating  this  defalcation.  Draft 
a  letter  to  your  client  explaining  why  you  did  not  discover 
the  defalcation,  also  stating  how  you  would  build  up  an 
organization  to  prevent  defalcations  of  this  kind  in  the  fu- 
ture. 

Question  627 

You  are  engaged  by  a  bank  to  make  an  audit  for  the 
purpose  of  reporting  the  correct  net  income  of  a  certain 


202  C.    P.    A.    AUDITING    QUESTIONS 

company  for  the  past  year.  The  directors  of  the  company 
have  already  reported  to  the  bank  that  the  net  income  for 
that  year  was  $100,000.  Your  examination  discloses  the 
following  facts: 

(1)  Depreciation    amounting   to    $20,000    was    not 

provided  for. 

(2)  According  to  the  terms  of  a  trust  deed,  under  a 

bond    issue,    $10,000    per    annum    should   be 
credited  to  a  sinking  fund. 

(3)  Dividends   of   $10,000   on   the  preferred   stock 

issue    were    payable    on   the    date    after   the 
closing  of  the  company's  books. 

State  in  what  respects  the  net  income  as  reported  by 
the  directors  to  the  bank  is  incorrect,  and  explain  how  each 
of  the  above  items  should  be  treated  in  the  company's  ac- 
counts as  at  the  date  of  the  audit. 

Question  628 

You  are  making  the  examination  of  a  financial  state- 
ment of  a  manufacturing  company  for  credit  purposes. 
Your  letter  of  verification  from  the  note  broker  disclosed 
the  fact  that  notes  aggregating  $70,000  have  been  sold  by 
him  and  the  proceeds  not  remitted  to  your  client  until  fifteen 
days  after  the  closing  of  his  books.  These  notes  of  $70,000 
represent  part  of  notes  aggregating  $100,000  which  were 
sent  to  the  note  broker  for  discount  one  month  prior  to  the 
date  of  closing,  $30,000  of  which  have  not  yet  been  sold  by 
the  note  broker.  No  entries  have  been  made  upon  the  books 
of  your  client  for  these  transactions.  The  client  claims  that 
he  has  the  right  to  offset  the  liability  for  the  discounted 
notes  with  the  proceeds  in  the  hands  of  his  note  broker,  as 
these  proceeds  had  not  been  remitted  to  him  until  after  the 


MISSOURI  2C3 

closing  of  his  books.     State  your  opinion  with  regard  tc 
this  contention. 

Question  629 

A  corporation  recently  organized  has  expended  a  con- 
siderable amount  for  advertising  its  products  in  newspapers, 
magazines,  and  on  bill  boards.  What  consideration  would 
guide  you  as  to  the  amount  to  be  written  off  annually  ? 

Question  630 

On  what  basis  should  an  inventory  of  a  car  builder 
company  be  prepared  ?  Deal  specifically  with  the  following 
classes  of  material : 

(1)  Lumber  purchased  from  a  sawmill  in  "green" 

state. 

(2)  Cars  under  construction — four-fifths  completed: 

(a)  When  $1,000  per  car  will  be  lost  on  com- 
pletion of  contract. 

'(b)  When  $1,000  per  car  profit  will  be  real- 
ized. 

(3)  Castings  manufactured  by  the  company. 


MINNESOTA 


Question  631 

Discuss  "the  proper  method  of  treating  discounts, 
freight,  and  haulage  on  goods  or  equipment  purchased," 
"on  goods  sold." 

Question  632 

Discuss  "the  limitations  of  an  investigation  of  a  busi- 
ness on  behalf  of  a  projected  purchasing  company."  To 
what  extent  would  fraud  by  employees  of  the  vendor  bear 
upon  the  subject? 

Question  633 

In  what  respects  would  an  investigation  of  a  business 
on  behalf  of  a  retiring  or  deceased  partner  differ  from  one 
on  behalf  of  a  projected  purchasing  company? 

Question  63J^ 

Discuss  "the  proper  method  of  presenting  the  condition 
and  earnings  of  a  holding  company  which  owns  from  75% 
to  100%  of  the  stock  of  a  number  of  subsidiary  corpora- 
tions." 

Question  635 

As  authorized  by  the  board  of  directors,  you  are  engaged 
to  make  an  investigation  of  the  Minneapolis  Grain  Com- 
pany for  the  purpose  of  preparing  a  certified  balance  sheet  as 

204 


MINNESOTA 


205 


at  August  31, 1910,  to  submit  to  the  banks  in  order  to  secure 
credit.  The  company  is  incorporated  for  $100,000,  divided 
into  1,000  shares  of  $100  each,  all  of  which  have  been  issued. 
The  trial  balance  taken  from  the  books  of  the  company 
is  as  follows: 


Wheat  

Flax   

Oats   

Barley   

Coal     

Wood $2,500.00 

Bills  payable 

Bills   receivable 5,000.00 

Accounts  receivable 40,000.00 

Capital    stock 

Options  or  trades 80,000.00 

Interest  15,000.00 

Elevators    100,000.00 

Insurance    7,000.00 

Memberships    7,500.00 

Capital    stock  —  Vienna    Farmers 

Elevator   Co 500.00 

Taxes    2,500.00 

Repairs  and   maintenance 5,000.00 

Furniture  and  fixtures 2,000.00 

General    expense 20,000.00 

Salaries   25,000.00 

Expense  account  1910  crop 500.00 

Accounts   payable 

Cash  in  bank  and  on  hand 23,000.00 

Surplus    


$50,000.00 

30,000.00 

25,000.00 

25,000.00 

5,000.00 

75,000.00 


100,000.00 


500.00 


25,000.00 


$335,500.00    $335,500.00 


On  August  31,  1910,  the  company  has  inventories  of 
grain,  coal,  and  wood  amounting  to  $50,000. 

In  accordance  with  instructions,  you  do  not  make  any 
allowance  for  depreciation  on  the  elevators,  neither  do  you 
accrue  taxes,  insurance,  or  interest.  All  other  accruals  have 
already  been  made. 


2o6  C.    p.    A.    AUDITING    QUESTIONS 

Prepare  balance  sheet  with  certificate  attached  to  be  sub- 
mitted to  the  bankers,  and  state  what  steps  you  have  taken 
to  satisfy  yourself  of  the  correctness  of  the  assets  and  lia- 
bilities of  the  company. 

Question  636 

Describe  the  methods  known  to  you  of  allowing  for 
depreciation.  Which  method  do  you  consider  the  most 
correct?    Give  reasons. 

Question  637 

A  company  under  its  articles  of  incorporation  is  re- 
quired to  set  aside  a  certain  percentage  of  its  profit  at  the 
close  of  each  year  to  provide  a  sinking  fund  for  the  retiring 
of  its  bonded  indebtedness  when  it  matures.  Give  the  en- 
tries necessary  to  be  made  in  the  books  setting  up  the  re- 
serve at  the  close  of  each  year,  also  the  entries  required  on 
the  books  when  the  bonds  are  paid  off  at  maturity. 

Question  638 

Give  the  general  headings  of  the  classification  of  the 
revenue  and  expense  accounts  which  are  required  to  be  kept 
by  a  railroad  under  the  Interstate  Commerce  Commission. 

Question  639 

Trade  discount  on  purchases  is  a  deduction  from  the 
cost  of  purchases.  Cash  discount  on  purchases  is  an  addi- 
tion to  income.     Explain  fully. 

Question  6JfO 

What  different  considerations  govern  the  valuation  for 
balance  sheet  purposes  of  "fixed"  and  "current"  assets? 


MINNESOTA  207 

Question  6Jfl 

A  mercantile  concern  sustains  a  partial  loss  by  fire.  The 
books  are  modern  except  no  cost  accounting  is  incorporated. 
The  end  of  the  fiscal  year  is  December  31,  when  a  physical 
inventory  is  taken;  the  fire  occurred  in  October  and  was 
evidently  a  two-thirds  loss,  with  full  insurance.  While  the 
adjusters  are  at  work  you  are  called  in  to  satisfy  the  firm  as 
to  their  loss,  so  that  they  may  be  prepared  for  discussion 
with  the  insurance  companies. 

Outline  your  procedure  and  state  how  you  arrive  at  the 
actual  loss. 

Question  642 

State  briefly  your  procedure  for  discovering  frauds  or 
errors  in  the  accounts  of  a  company  because  of: 

(1)  Merchandise  charged  to  customer  but  still  in 

store. 

(2)  Merchandise   received    into   store,   but   not   re- 

corded on  books. 

(3)  Merchandise  delivered  but  not  charged  to  cus- 

tomer. 

(4)  Cash  received  but  not  entered  in  cash  book. 

Give  your  suggestions  as  to  method  of  bookkeeping,  etc.,  for 
preventing  these  in  the  future. 

Question  6JfS 

In  your  examination  of  the  Horses  and  Wagons  ac- 
count of  a  company  you  find  the  following  transactions 
have  taken  place : 

(1)  Purchase  of  new  horses  to  replace  dead  ones. 

(2)  Horses  exchanged  and  payment  made  for  dif- 

ference in  value. 


2o8  C.    P.    A.    AUDITING    QUESTIONS 

(3)  Loss  of  horses  and  wagons  through  accident, 
covered  by  insurance. 

How  would  you  suggest  such  matters  should  be  treated 
in  the  Horses  and  Wagons  account? 

Question  6J/.Jf. 

Define  "Internal  Check"  and  give  five  suggestions  with 
a  view  to  efficient  control  and  the  prevention  and  detection 
of  fraud. 

Question  6J^5 

State  concisely  how  you  would  treat  branch  accounts 
in  the  head  office  books,  and  your  reasons  for  so  doing. 

Question  6Jf6 

Referring  to  the  previous  question,  in  preparing  a  com- 
bined operating  statement,  what  special  accounts  should  be 
examined  ? 

Question  6J^7 

State  the  special  features  which  pertain  to  the  audit  of 
the  books  and  accounts  of  a  milling  company. 

Question  6^8 

State  the  special  features  which  pertain  to  the  audit  of 
the  books  and  accounts  of  a  theatre. 

Question  6^9 

State  your  understanding  of  the  term  "Contingent 
Liability"  and  give  three  examples  of  how  it  may  occur. 
How  would  you  treat  such  a  liability  on  the  balance  sheet  ? 


MINNESOTA  209 

Question  650 

You  are  called  upon  to  investigate  the  accounts  of  a 
corporation  for  a  period  of  ten  years  and  to  certify  to  the 
following : 

Net  sales  in  each  year. 

Net  profit  in  each  year. 

Actual  cash  introduced  into  the  business. 

Discuss  the  proper  method  of  procedure  to  arrive  at 
these  figures,  not  overlooking  the  fact  that  the  company  has 
several  branches  who  sell  to  each  other  and  that  the  capital 
stock  was  partly  issued  at  a  premium. 

Question  651 

When  certifying  a  balance  sheet  do  you  object  to  the 
bulking  of  several  assets  in  one  account?  If  so,  why? 
Give  one  example  where  it  is  policy  to  do  this. 


VIRGINIA 


Question  652 

A  &  Co.  acquire  the  plants  of  B,  C,  D,  and  E,  assuming 
their  assets  and  HabiHties  at  book  values,  the  purchase  price 
being  one-half  of  the  amount  shown  by  the  Surplus  account 
of  each.  Without  going  into  lengthy  detail,  but  just  con- 
sidering the  three  items,  Assets,  Liabilities,  and  Surplus, 
what  entries  would  you  make  to  set  up  these  accounts  in  the 
ledger  of  A  &  Co.  ? 

Question  653 

If  it  was  found,  after  acquiring  the  above  plants,  that 
large  amounts  had  to  be  expended  in  improvements  to 
bring  the  plants  up  to  their  rated  efficiency : 

(a)  Give  a  concise  but  full  explanation  of  how  you 
would  classify  such  expenditures,  naming  the  accounts  you 
would  debit  and  credit. 

(b)  Would  such  expenditures  have  any  relation  to  the 
50%  equity  A  &  Co.  were  supposed  to  have  purchased? 

(c)  State  your  reasons   for  the  preceding  answer. 

Question  65Jf. 

What  disposition  would  you  make  of  any  depreciation 
reserve  account   when   constructing  the   balance   sheet? 
State  your  reasons  for  above  answer. 

2IO 


VIRGINIA  211 

Question  655 

State  whether  depreciation  is  an  element  of  the  cost  of 
manufactured  products. 

Question  656 

In  a  cash  book,  in  which  all  accounts  paid  by  customers 
were  entered  at  the  gross  amount  and  allowance,  freight, 
etc.,  were  treated  as  disbursements,  and  the  net  amount 
covered  by  the  remittance  was  put  in  bank,  and  all  cash 
book  disbursements  were  covered  by  checks  properly  en- 
tered, you  find  that  the  cash  book  and  bank  balance  agree. 
Explain  how  a  shortage  could  actually  exist  under  these 
conditions. 

Question  657 

A  lumber  company  issues  the  followmg  statement,  and 
one  of  the  stockholders  submits  it  to  you,  as  he  cannot  un- 
derstand how  135,000  ft.  sold  at  average  of  $8.15  per  M 
can  produce  a  profit  of  $880  with  a  cost  of  $6.50  per  M. 

Make  your  report  with  reasons  why  the  statement  is  in 
error  and  illustrate  with  a  new  statement  of  operation 
applying  the  inventories  where  they  correctly  belong  at 
proper  value,  and  showing  the  cost  of  each  operation  and 
the  cost  of  the  material  as  it  works  through  from  operation 
to  operation. 

PINE  TOP  LUMBER  COMPANY 
STATEMENT  OF  OPERATION— JUNE  1,   1913 

1^^°^^  Average 

Sales:  Cost 

100,000  ft.  rough  lumber $750.00        $7.50 

35,000  "   dressed    "       350.00        10.00 

Total  income $1,100.00        $8.15 


212  C.     P.    A.    AUDITING    QUESTIONS 

Expense 

Logging,  400,000  ft $1,200.00  $3.00 

Hauling  to  mill,  300,000  ft 300.00  1.00 

Sawing  at  mill,  200,000  ft 300.00  1.50 

Planing,  50,000  ft 50.00  1.00 

$1,850.00        $6.50 
Less:  Inventory  (estimatt^d  values): 
100,000  ft.  logs  in  woods  @  $2.50  $250.00 
100,000  ft.  logs  at  mill  @    4.00    400.00 
50,000  ft.  rough  lumber  @    7.00     350.00 
15,000  ft.  dressed  lumber©    8.00     120.00     1,120.00 


Cost $730.00 

Profit    370.00 


$1,100.00 


Question  658 

A  and  B  join  in  business  and  turn  over  to  the  new  firm 
furniture : 

A— $2,000.00 

B—  1,500.00 
which  leaves  A  an  equity  of  $500.  A  claims  that  B  should 
pay  him  this  amount  because  he  (A)  already  owns  the  fur- 
niture and  if  the  firm  pays  him  it  will  be  out  of  earnings  or 
money  to  half  of  which  he  is  actually  entitled,  and  that  he 
would  actually  and  that  he  would  virtually  be  paying  him- 
self, with  his  own  funds,  for  something  he  now  owns.  B 
claims  that  payment  by  the  firm  is  a  correct  settlement. 
Which  one  is  right,  and  state  your  reason  so  clearly  that 
no  further  doubt  could  remain  with  the  other  party. 

Question  659 

State  how  you  would  verify  the  Plant  account  for  a 
concern  that  had  been  actively  engaged  in  the  manufac- 
turing business  for  20  years — the  books  not  showing  any 
credits  to  Plant  account  nor  Reserve  for  Depreciation. 


MASSACHUSETTS 


Question  660 

How  do  you  ascertain  the  correctness  of  the  issue  of 
stock  of  a  corporation?  State  the  names  of  the  books 
wherein  such  records  are  kept  and  tell  how  the  books  are 
opened  and  operated ;  also  state  what  course  you  would  ad- 
vocate to  prevent  an  overissue  of  stock. 

Question  661 
A  corporation  issued  its  note  for  $30,000.  The  note 
became  due  during  the  term  which  you  were  auditing.  A 
note  for  this  amount,  corresponding  in  all  particulars  with 
the  note  record,  is  submitted  to  you  as  evidence  that  the 
amount  has  been  paid.  Said  note  is  marked  "paid"  but 
does  not  bear  the  signature,  or  paid  stamp,  of  the  bank  to 
whom  it  is  purported  to  have  been  paid.  The  treasurer 
asserts  that  possession,  by  the  corporation,  of  this  note  is 
sufficient  evidence  of  its  payment.  State,  (a)  your  opinion 
thereof,  and  (b)  your  reasons. 

Question  662 
For  several  successive  terms,  a  corporation  has  regu- 
larly deducted  $15,000  from  its  inventory  of  stock  in  pro- 
cess ;  the  inventory  prices  being  conservatively  below  market 
value.  Then,  for  the  quarter  ended  June  30,  1908,  while 
following  the  same  conservatism  regarding  prices,  the 
$15,000  deduction  was  discontinued,  and  the  treasurer 
made  his  statement  of  earnings  during  the  term,  based  upon 

213 


214  ^-    P-    ^-    AUDITING    QUESTIONS 

the  inventory  amount  of  stock  in  process.  State,  (a) 
whether  you  agree  therewith;  (b)  the  reasons  for  your 
agreement  or  disagreement;  and  (c)  if  you  disagree  with 
the  treasurer's  treatment  of  the  matter,  how  you  would 
deal  with  the  item  in  your  statement  of  the  earnings  and 
of  surplus. 

Question  663 

In  reporting  to  the  Bank  Commissioner  on  the  condi- 
tion of  a  corporation  borrowing  from  savings  banks,  state 
briefly  the  extent  to  which  you  would  verify  each  of  the 
items  usually  found  in  the  balance  sheet. 

Question  66J^ 

A  water  registrar,  who  handled  all  collections,  and  kept 
the  books,  but  who  was  not  allowed  to  sign  checks,  bor- 
rowed from  the  funds,  and  in  the  month  of  December  in 
each  year  secured  outside  funds  to  replace  the  shortage,  so 
that  his  cash  was  always  found  correct  on  December  31, 
date  of  closing. 

He  entered  disbursements  on  the  cash  book  under  date 
of  approval  of  same,  and  not  on  day  of  payment,  so  that 
his  cash  book  never  showed  the  true  cash  on  hand,  except  in 
the  last  few  days  of  the  year. 

Several  auditors  approved  his  accounts,  until  finally  one 
of  them  discovered  the  trouble  in  the  regular  course  of  his 
work. 

Why  did  the  former  auditors  fail  to  detect  the  condition 
of  affairs? 

Question  665 

In  the  general  ledger  of  a  corporation  is  a  controlling 
account  for  the  accounts  receivable ;  the  individual  accounts 
relating  thereto  being  kept  in  an  accounts  receivable  ledger. 


MASSACHUSETTS  215 

The  balance  of  the  controlling-  account  is  $550,000.  The 
total  of  the  balances  at  the  debit  of  the  individual  accounts 
is  $590,000;  the  total  of  the  balances  at  the  credit  of  the 
individual  accounts  is  $40,000.  The  corporation  issues  to 
banks,  a  balance  sheet  showing  its  accounts  receivable  as 
$550,000.  State,  (a)  v^hether  you  approve  of  same;  (b) 
if  you  differ,  what  you  would  enter  in  the  balance  sheet; 
and  (c)  your  reasons. 

Question  666 

In  auditing  the  accounts  of  a  corporation,  what  steps  do 
you  take  to  ascertain  the  correctness  of  its  ledger  accounts 
with  a  selling  house? 

Question  667 

State  fully  how  you  would  verify  the  bank  account  of 
a  concern  depositing  with  six  banks,  and  making  frequent 
transfers  of  funds  between  them. 

Question  668 
Of  what  value  in  auditing  is  a  unit  of  production  ? 

Question  669 

A  client  (A.  B.  Co.)  presents  you  the  following  state- 
ment as  of  January  1,  1912  : 

ASSETS  LIABILITIES 

Gash    $10,600.27  Notes   payable $20,000.00 

Accounts   receivable..     30,219.73  Accounts  payable....     30,140.10 

Merchandise    39,320.14  Profit  and  loss 5,000.04 

Machinery    10,000.00  Capital    stock 40,000.00 

Loans  to  directors....     5,000.00 


$95,140.14  $95,140.14 


2i6  C.    p.    A.    AUDITING    QUESTIONS 

You  are  required  on  January  10,  1912,  to  make  suffi- 
cient examination  and  audit  to  certify  the  statement  for 
credit  purposes. 

State  fully  how,  and  to  what  extent,  you  would  verify 
the  different  items,  and  draw  formal  certificate  covering 
same. 

Question  670 

A  corporation  takes  from  its  customers  their  notes  in 
partial  settlement  of  their  accounts.  Some  of  these  notes 
are  discounted  by  the  corporation,  and  with  its  unlimited 
indorsement.  Notes  Receivable  account  is  credited  with 
the  notes  discounted;  and  Interest  account  is  charged  with 
the  discount.  State,  (a)  your  procedure  in  auditing  the 
notes  receivable  transactions;  (b)  how  you  would  ascertain 
what  notes  are  not  matured;  and  (c)  how  you  would  deal 
with  the  latter  in  the  certificate  of  your  audit  ? 

Question  671 

In  auditing  the  accounts  of  a  tax  collector,  what  should 
be  done  to  determine  if  he  accounts  for  the  interest  on  over- 
due taxes  paid  ? 

Question  672 

You  are  auditor  of  a  manufacturing  corporation  which 
has  been  operating  five  years  and  which  has,  amongst  other 
accounts,  the  following,  viz. :  Plant  account,  $700,000 ;  Re- 
serve for  Depreciation,  $200,000;  Surplus,  $100,000.  The 
officers  ask  you  to  certify  a  statement  embracing  the  above 
items  in  the  following  form,  viz. :  "Plant,"  $700,000 ;  "Sur- 
plus and  Reserve  accounts,"  $300,000.  State,  (a)  whether 
you  approve  same;  and  (b)  the  reasons  supporting  your 
answer. 


MASSACHUSETTS  217 

Question  673 
How  would  you  audit  the  accounts  of  a  tax  collector  ? 

Question  67J^ 

The  officers  and  directors  of  a  Massachusetts  corpora- 
tion have  executed  and  submitted  to  you,  for  your  signature 
as  the  auditor  chosen  under  the  provisions  of  the  statutes, 
their  certificate  of  condition,  April  1,  1912.  At  the  same 
time,  the  treasurer  asks  you  to  prepare  the  corporation's 
^'Return"  to  the  tax  commissioner,  April  1,  1912,  showing, 
therein,  valuations  of  the  merchandise  and  accounts  receiv- 
able which  the  treasurer  claims  to  be  fair  cash  values,  but 
which  are  less  than  the  respective  amounts  included  in  the 
certificate  of  condition.  State  what  action  you  would  take, 
(a)  regarding  the  certificate  of  condition;  (b)  regarding 
the  tax  ''Return";  and  (c)  the  reasons  supporting  your 
answers. 

Question  675 

Your  visit  as  auditor  of  the  Iroquois  Savings  Bank  of 
Pittsfield  happens  to  be  concurrent  with  that  of  the  ex- 
aminers from  the  Bank  Commissioner's  office.  State  in 
detail  what  modifications,  if  any,  you  would  feel  justified 
in  making  in  the  scope  and  thoroughness  of  your  audit. 

Question  676 

A  corporation  has  on  its  books  $210,000  of  accounts  re- 
ceivable, of  which  $49,000  are  long  overdue,  and  apparently 
worthless.  The  inventory  of  finished  goods,  taken  at  con- 
tract price,  less  5%,  amounts  to  $124,000,  and  from  this 
sum  has  been  deducted  $45,000,  *'to  provide  for  any  losses." 

How  would  you  deal  with  this  state  of  affairs  in  report- 


2i8  C.    p.    A.    AUDITING    QUESTIONS 

ing  to  the  Bank  Commissioner  on  the  condition  of  the  cor- 
poration for  savings  bank  loans? 

Question  677 

The  "system  of  internal  checking"  of  a  savings  bank 
calls  for  regular  observance  by  the  board  of  investment, 
whether  the  records  of  collateral  received,  and  changes 
thereof,  on  loans,  accord  with  the  votes  of  the  board.  Un- 
der these  conditions,  and  in  the  case  of  loans  on  collateral 
security,  state,  (a)  whether  you  would  write  to  each  bor- 
rower to  send  you  the  details  of  the  note,  together  with  a 
list  of  the  collateral  deposited  therewith;  (b)  whether  you 
would  ascertain  the  market  value  of  the  collateral ;  (c)  what 
action  you  would  take  if  you  thought  that  the  character  of 
the  collateral  was  inferior,  or  that  the  margin  was  insuffi- 
cient. State,  (d)  whether  you  would  restrict  the  extent 
of  your  general  audit  because  of  a  high  degree  of  excellence 
in  the  **system  of  internal  checking";  and  (e)  the  reasons 
supporting  your  answers. 

Question  678 

A  corporation  in  closing  its  fiscal  year  has  some  60  items 
of  current  liabilities,  which  it  enters  on  its  books  as  follows : 

(Sundry  accounts) $53,827.34 

Accounts  payable .  $53,827.34 

On  the  first  day  of  the  new  year,  the  bookkeeper  makes 
the  following  entry : 

Accounts  payable $53,827.34 

(Sundry  accounts) $53,827.34 

How  should  the  auditor  deal  with  this  condition? 


MASSACHUSETTS  219 

Question  679 

You  are  instructed  to  audit  the  accounts  of  a  corporation 
having  the  following  assets :  cash,  accounts  receivable,  mer- 
chandise, machinery,  real  estate,  expense  paid  in  advance; 
and  the  following  liabilities :  accounts  payable,  notes  pay- 
able, capital  stock,  reserve  for  depreciation  of  plant,  reserve 
for  sales  discount,  and  taxes  accrued. 

To  what  extent  would  you  consider  it  necessary  to  verify 
these  items,  and  what  reference  to  such  verifications  would 
you  make  in  )^our  report? 

Question  680 

After  taking  an  inventory  of  the  finished  goods  of  a  con- 
cern, it  was  found  that  all  were  not  on  hand  that  should 
have  been. 

Select  some  business  with  which  you  are  familiar,  and 
state  what  steps  you  would  take  to  account  for  the  discrep- 
ancy. 

Question  681 

In  the  verification  of  a  bank  account,  would  you  ever 
check  the  list  of  paid  checks  returned  by  the  bank,  and,  if 
so,  what  might  you  discover  ? 

Question  682 

A  corporation  has  been  accustomed  to  charge  the  pur- 
chase of  machinery  to  the  Machinery  account  at  cost,  and 
each  year  to  change  the  Manufacturing  account  and  to 
credit  a  reserve  for  depreciation  account  with  an  amount 
which  will  offset  the  cost  of  the  machinery  by  the  time  it  is 
estimated  that  it  will  be  advisable  to  scrap  the  machines. 
During  the  period  that  you  have  been  employed  to  audit 
the  account,  you  find  that  the  corporation  has  sold  two  ma- 


220  C.    P.    A.    AUDITING    QUESTIONS 

chines  for  $500  each,  and  this  amount  has  been  credited  to 
the  Machinery  account.  One  of  them  cost  $1,000,  and  the 
amount  reserved  for  depreciation  on  this  machine  is  $600. 
The  other  cost  $1,500,  and  the  amount  reserved  for  depre- 
ciation is  $850. 

Make  the  adjusting  entries  to  correct  the  books. 

Question  683 

If  you  were  auditing  the  books  of  a  savings  bank  at  the 
close  of  its  fiscal  year,  how  would  you  verify  the  cash  book 
entries  for  loans  on  deposits  which  were  made  and  repaid 
during  the  year  ? 

Question  68Jf 

The  engraved  copper  rolls  used  to  print  patterns  on 
calico  are  inventoried  by  the  concern  at  the  market  value  of 
the  copper  in  the  rolls. 

In  your  certificate  to  the  Bank  Commissioner  should, 
(a)  the  amount  be  classified  as  part  of  the  current  assets,  or 
as  a  portion  of  the  plant  items  ? 

(b)  State  the  reasons  supporting  your  answer. 

Question  685 

A  corporation  in  paying  two  bills,  fastens  the  bills  to- 
gether, adds  to  the  first  bill  of  the  two  the  amount  of  the 
second  bill  and  sends  these  with  a  check  for  receipt.  When 
returned,  only  the  top  bill  is  receipted.  Do  you  consider  this 
a  valid  voucher?  If  not,  how  could  you  satisfy  yourself 
at  the  office  of  the  corporation  ? 

Question  686 

A  certified  public  accountant,  having  performed  the 
duty  at  the  close  of  several  years,  takes  up  for  a  year  just 


MASSACHUSETTS  221 

past,  the  examination  of  bonds — the  property  of  an  institu- 
tion. At  his  last  examination  he  found  coupon  bonds  in 
three  classes,  registered  as  to  principal,  registered  as  to 
principal  and  income,  and  unregistered.  In  his  examination 
o£  the  books  of  account  of  the  institution,  he  found  that 
bonds  had  been  bought  during  the  year. 

To  make  an  efficient  examination  in  the  most  expeditious 
way,  how  might  he  treat  these  various  classes? 

Question  687 

It  was  the  custom  of  a  treasurer  to  print  and  circulate 
an  annual  report  covering  the  transactions  of  the  year,  and 
a  statement  of  condition.  A  "Profit  and  Loss  Account" 
was  stated  in  substantial  detail ;  that  is,  stating  the  balance 
at  beginning  of  the  year,  and  adding  or  deducting  such  items 
as  the  result  of  transactions  required.  The  books  and  the 
treasurer's  account  were  examined  by  a  certified  public  ac- 
countant, and  on  the  printed  report  in  addition  to  the  treas- 
urer's name  there  usually  appeared  "Examined  and  Ap- 
proved," followed  by  the  name  of  the  accountant  as  such. 
The  examiner  also  usually  gave  a  formal  certificate  of  ex- 
amination. The  examination  for  a  certain  year  shows  the 
books  of  account  to  be  correct  as  a  record,  and  payments 
were  vouched;  but  the  treasurer  not  only  changed  the 
"make-up"  of  the  "Profit  and  Loss  Account"  by  including 
items  not  before  included  (among  which  was  an  arbitrary 
increase  in  value  of  real  estate),  but  also  omitted  to  men- 
tion these  items,  and  stated  the  "Profit  and  Loss  Account" 
as  a  single  general  amount.  The  examiner  objected  but 
was  overruled. 

What  action  should  the  examiner  take?  Give  a  reason 
for  your  answer. 


222  C.    P.    A.    AUDITING    QUESTIONS 

Question  688 

A.  B.  is  a  heavy  speculator  on  margin  on  the  stock  ex- 
change, buying  and  selHng  in  numerous  transactions  a  large 
variety  of  securities.  His  broker,  C.  D.,  renders  him' 
monthly  a  statement  of  transactions  and  an  account  current. 

State  the  steps  you  would  take  to  completely  audit 
C.  D.'s  monthly  account  current  and  statement. 

Question  689 

The  Citizens  Relief  Association  prints  stamps  of  various 
denominations  ranging  from  5  cents  to  $1.  The  bulk  of 
them  remain  in  the  custody  of  its  treasurer.  He  supplies  a 
limited  quantity  of  them  to  the  manager,  w^ho  from  time  to 
time  issues  them  to  benevolent  persons  in  exchange  for 
their  face  value  in  money.  This  money  is  retained  in  the 
manager's  office  to  cash  stamps  presented  by  applicants 
for  aid. 

How  would  you  audit  this  phase  of  the  association's 
activities  ? 


NORTH   CAROLINA 


Question  690 

(a)  What  support  would  you  require  in  the  case  of  a 
corporation  purchasing  its  own  stock  at  a  premium  or  dis- 
count? (b)  State  how  the  transaction  should  be  treated  on 
the  books. 

Question  691 

(a)  In  case  of  the  absence  of  a  voucher  system,  and 
there  are  no  supports  for  disbursements  except  book  en- 
tries or  cancelled  bank  checks,  state  how  you  w^ould  satisfy 
yourself  that  the  disbursements  represented  proper  and 
regular  transactions. 

(b)  State  how  you  would  satisfy  yourself  of  the  regu- 
larity and  correctness  of  a  pay-roll  that  was  not  signed  by 
payees. 

Question  692 

In  what  manner  could  there  be  a  shortage  of  cash,  when 
all  receipts  had  been  regularly  entered,  and  the  cash  book 
and  bank  accounts  reconciled,  and  how  detected? 

Question  693 

With  wdiat  special  reference  should  capital  expenditures 
be  examined? 

Question  69J/^ 

What  are  the  distinctive  features  in  the  support  of  the 
disbursements  in  governmental  accounting? 

223 


224  C.    P.    A.    AUDITING    QUESTIONS 

Question  695 

Under  what  conditions  can  the  additions  of  the  cash 
book  be  verified  without  actually  adding  same,  and  state 
the  advantages  ? 

Question  696 

To  what  extent  is  it  necessary  to  verify  the  classifica- 
tion of  expenses? 

Question  697 

In  an  audit  of  a  set  of  books  provided  with  proper  con- 
trolling accounts,  to  what  extent  would  you  check  ledger 
postings  ? 

Question  698 

In  the  audit  of  the  books  of  a  corporation,  covering  a 
period  of  three  years,  for  a  bond  house  contemplating  the 
placing  of  a  large  issue  of  bonds,  to  what  particular  points 
would  you  direct  your  special  attention? 


MAINE 


Question  699 
In  your  judgment  should  or  should  not  a  state  auditor 
be  required  by  law  to  be  the  holder  of  a  C.  P.  A.  certificate? 
Give  your  reasons  fully. 

Question  700 
You  are  called  to  audit  a  savings  bank  in  Maine,  and 
find  that  said  savings  bank  is  carrying  commercial  accounts ; 
that  is,  accounts  subject  to  check,  on  which  no  interest  is 
being  paid.  You  also  ascertain  that  the  State  Bank  Ex- 
aminer is  fully  aware  of  this  fact  and  that  he  has  allowed 
said  savings  bank  to  continue  to  carry  this  class  of  accounts. 
What  would  you  consider  it  your  duty  to  report  concerning 
this  particular  matter  to  the  trustees  and  depositors? 
Would  you  consider  it  your  duty  at  all  to  advise  with  the 
State  Bank  Examiner  relative  to  the  matter  ? 

Question  701 
In  making  an  audit  of  a  Maine  corporation  you  find  that 
its  assets,  as  a  going  concern,  exceed  its  liabilities  by  only 
a  few  thousand  dollars.  You  also  discover  that  the  cor- 
poration, in  direct  violation  of  the  National  Bank  Act,  is 
borrowing,  under  different  names  and  indorsements,  much 
more  than  10%  of  the  bank's  combined  capital  and  surplus 
from  a  national  bank  with  which  it  does  business.  Would 
you  consider  it  your  duty  to  bring  this  fact  to  the  attention 
of  the  bank?  Or  to  the  attention  of  the  Bank  Examiner? 
State  your  reasons  fully. 

225 


226  C.    P.    A.    AUDITING    QUESTIONS 

Question  702 

A  Rockland,  Maine,  corporation,  incorporated  under 
the  general  law  of  Maine,  acquires  several  plants  that  are 
found  to  be  run  down  and  in  poor  condition,  and  they  re- 
quire extensive  outlay  for  repairs  and  renewals  to  bring 
them  to  the  required  state  of  efficiency.  Should  outlay  be 
charged  against  capital  or  against  revenue?  Give  your 
reasons  fully. 

Question  703 

Explain  the  various  measures  you  would  adopt  to  verify 
whether  or  not  all  cash  received  has  been  duly  accounted  for 
on  the  books  of  the  concern  you  were  auditing. 

Question  70Jf 

A  balance  sheet  audit  discloses  satisfactory  conditions 
with  the  exception  of  insufficient  allowance  for  losses  in 
collection  of  accounts  receivable.  In  case  your  client  should 
not  consent  to  adjustment,  draft  form  of  certificate  that 
would  be  proper  under  the  circumstances. 

Question  705 

Outline  working  papers  and  office  records  necessary  to 
handle  detailed  semiannual  audit  of  a  wholesale  mercantile 
house. 


INDEX 


(References  are  to 

A 
Acceptances 
and  bad  debts  account,  135 
dishonored,  evidence  of,  135 
in  bills  receivable  balance,  136 
of  bills  due  consignor,  304 
Accountancy 

ethics  of,  270 
Accountant 

distinguished   from   bookkeeper, 

522 
public,  522 
Accounts 
assigned  and  concealed,  306 
audit  of  general  ledger,  597 
branch,  in  head  office  books,  645 
construction,   bond  discount 

charged  to,  608 
controlling  ledger,  105 
customers',  verification  of,  607 
differentiation  of,  44 
horse  and  wagon,  643 
income  and  expenditure,  114 
partnership,  103 
payable,  discounts  on,  152 
receipts  and  payments,  114 
revenue  and  expense,  Interstate 
Commerce    Commission    r  e  - 
quirements,  638 
significance  of  balances,  44 
technical  errors  in,  183 
Accounts  receivable 
auditor's  view  of,  428 
bad,  how  determined,  8 
checking  against  controlling  ac- 
count, 576 
how  written  off,  558 

227 


question  numbers) 

kept  in  sub-ledger  without  con- 
trol, 555 
not  verified,  290 
of  long  standing,  558 
on  balance  sheet,  54 
overdue  and  worthless,  676 
past   due    in    suspense   account, 

474 
reserve  for  bad,  510,  704 
suspense,  281 
Accrued  interest  (See  "Interest") 
Administrator  (See  "Executor") 
Advertising,  how  written  off,  629 
Agent,  life  insurance 
report,  audit  of,  272 
Agent's    accounts,    corrections   in, 

131 
Allowances 

on  merchandise  returned,  233 
verification  of,  106 
Amortization     of     manufacturing 

plant  debt,  388 
Appraisals,  should  auditor  accept, 

604 
Assets 
bills  receivable,  11 
commissions  as,  98 
correct  valuation  of,  6 
depreciation  of,  27,  11 1" 
fixed  and  current,  640 
manufactured  goods,  11 
objection  to  grouping,  651 
open  accounts,  11 
overvaluation  of,  548 
proof  of  existence,  478 
proof  of  value,  478 
proper  grouping  of,  651 


228 


INDEX 


(References  are  to 

Assets — continued 
raw  materials,  ii 
stocks,  bonds,  etc.,  ii 
unusual,  143 
Audit 
advantages  of,  483 
after  closing  books,  562 
balance  sheet,  593 
bank,  when  to  begin,  249 
cash,  212,  513,  593 
classes. of,  513 
concealed  accounts,  detection  of, 

306 
continuous     (See     "Continuous 

Audit") 
differs  from  investigation,  593 
disbursements,  180 
disposition  of 

charges  to  plant,  475 

commissions,  475 

discounts,  475 

organization  costs,  475 

premiums,  475 
distinguished  from  examination, 

335,  346 
first,  2,  257 

for  ascertaining  profits  of  cer- 
tain period,  488 
for  limited  period,  225 
for  purchaser,  532 
from    cash    book    and    journal 

only,  no 
from  invoices  and  vouchers,  no 
general  course  of,  526,  578 
kinds  of,  175,  513 
machinery,  53 
merchandise,  53 
objects  of,  12 
of  agency  accounts,  yy 
of  bank,  578,  612 
of  capital  account,  588 
of  cash,  177,  277 
of  city  clerk's  office,  578 


question  numbers) 

of  coal  mining  company,  612 

of  county  treasurer's  office,  578 

of  dry  goods  store,  181 

of  familiar  business,  334 

of  iron  manufacturing  plant,  185 

of  lumber  company,  612 

of  machinery,  87 

of  mercantile  house,  578 

of  outstanding  accounts,  189 

of  partial  payment  accounts,  228 

of  partnership  accounts,  103 

of  pass  book,  70 

of  personal  accounts  in  general 

ledger,  97 
of  premium  on  lease,  475 
of  real  estate,  53,  168 
of  revenue  account,  588 
of  securities,  177 
of  stock  broker's  books,  245,  612 
of  trustee's  accounts,  103 
of  unfamiliar  business,  250,  584 
requirements  of,  523 
semiannual,  39,  258 
single-entry,  71 
valuation  of  machinery,  53 
valuation  of  merchandise,  53 
valuation  of  real  estate,  53 
verification  of  inventory,  241 
what  constitutes  an,  108 
without  cash   book,  journal,  or 

ledger,  149 
without  subsidiary  ledgers,  161 

Audit,  complete 

distinct    from    continuous,    513, 

594 
for  brass  foundry,  620 
for  electric  light  company,  62a 
for  dry-goods  store,.  620 
of  general  ledger,  5981 

Auditing  procedure,  526' 

Auditor 

acting  for  opposing  parties,  280 
action  on  proposition,  523 


INDEX 


229 


(References  are  to 

Auditor — continued 
as  regular  employee,  476 
certificate  of  (See  "Certificate") 
co-operation  with  local  account- 
ant, 261 
criticism  of  management,  352 
failure  to  discover  fraud,  664 
instructions  for  cashier,  477 
protection     against    imposition, 

213 
relation  to  clients  and  bookkeep- 
er, 347 
report  of  (See  "Report") 
test  of  ability,  69 
Auditor's  duties 

as  to  appraisals,  604 
as  to  certificates,  91,  124 
as  to  cost  values  and  deprecia- 
tion, 157 
as     to     depreciated     machinery, 

411,  624 
as  to  depreciated  real  estate  and 

other  values,  416,  624 
as  to  errors  in  closed  books,  583 
as  to  good-will,  valuation  of,  155 
as  to  instructions,  519 
as  to  loans,  doubtful  debts  and 

good- will,  411 
as  to  manufacturer's  inventory, 

512 
as    to    minutes    of   corporation, 

417 
as  to  missing  stock  certificate, 

169 
as  to  report  on  net  profits,  78 
as  to  secret  reserves,  170 
as  to  statement  of  condition  of 

business,  323 
as  to  stock  inventories,  480 
as    to    theories    of    examination 

and  certification,  479,  591 
as  to  validity  of  transactions,  88 


question  numbers) 

as  to  value  of  outstanding  stock, 

158 
in    absence    of   current    records 

and  trial  balance,  76 
in  confidential  and  personal  mat- 
ters, 347 
in  England  and  America,  561 
in  first  audit,  2 
when  not  allowed  to  inspect  all 

branches,  167 
Auditor's  responsibility  for 
certificates,  52 

depreciation  allowances,  10,  138 
discounts,  10 
inventories,  10 
omitted  items  in  audit,  458 
pay-rolls,  10 
Auditor,  State 

qualification  of,  699 
Automobile  concern 
acceptances  unpaid  in  inventory, 

298 
audit  of,  406 
goods     in     warehouse     omitted 

from  inventory,  298 
inventory  and  agents'  accounts, 

406 

B 

Balance  sheet 

and  trial  balance,  49 
assets  and  liabilities,  186 
betterments,  i 
certification  of,  196 
certification  of  assets,  441 
certified  for  credit  purposes,  635 
certified  form  of,  432^ 
correct  annual  income  in,  47 
correctness,  how  tested,  zz 
cumulative     dividends     unpaid, 

120 
depreciation  of  plant  in,  90 
doubtful  debts  in,  40 


230 


INDEX 


(References  are  to 

Balance  sheet — continued 

enhanced  values  of  property  in, 

34 
example  of,  for  criticism,  516 
expenditures  in,  correct  annual, 

47 

form  and  arrangement  of,  599 

influence  on  stock  sales,  288 

interest  paid,  90 

items  of  fact  or  of  opinion,  450 

items  omitted  from,  459 

leases,  how  treated  in,  41 

liabilities  in^  204 

losses  on  collections  in,  262 

maintenance  and  repair  items,  i 

mortgage  bonds  in,  173 

partners'  accounts  in,  72 

payments   for   work   in   process 
in,  z^^ 

premiums  unpaid,  119 

preparation  without  closing  ac- 
counts, 436 

proof  of  assets,  478 

revision  after  certification,  81 

unexpired  insurance  in,  90 

unsold  goods  in,  79 

with  supporting  schedules,  263 
Bank  account 

deposits  with  banks,  667 

verification  of,  667,  681 
Bank  balance,  correctness  of,  142 
Bank  commissioner 

auditor's  report  to,  676 

co-operation  with  auditor,  675 
Bank  pass  book 

as  voucher  for  cash  book  entries, 
70 

for  audit  purposes,  70 
Bank,  private 

audit  of  unpaid  checks  charged 
to  depositors,  89 

liability   for   unrecorded   certifi- 
cates of  deposit,  464 


question  numbers) 

Banks 

audit  of,  25,  194 

audit  of  national,  354 

books  for  national,  399 

collateral'    loan    department    of, 
396 

inspection  of  securities,  64 

loans  from  savings,  663 

overdrafts  on,  174 

reconcilement  account  for  checks 
outstanding,  129 

reports  of  national,  354 

reports  to   bank    commissioner, 
663 

safeguards  against  fraud,  379 

time  of  beginning  audit,  249 

verification  of  balance,  58 

verification  of  partial  payments, 
462 
Bank  teller 

cash  shortage  of,  detection,  221 

"proof"  of,  291 
Beneficiaries,  audit  in  interest  of, 

137 
Betterments  and  renewals 

as  affecting  profits,  321 

average  profits,  effect  on,  36 

how  charged,  163 

in  balance  sheet,  i 

in  profit  and  loss  account,  i 

items  chargeable  to,  324 

of    public    service    corporation, 
232 

replacing  old  machines,  588 
Bills  payable 

analysis  of  account,  256 

assumed  by  corporation,  164 
Bills  receivable 

as  securities,  19,  585 

at  end  of  fiscal  period,  133 

audit  of,  104,  133 

discounted,  86 

fraud  by  substitution  of,  275  . 


INDEX 


231 


(References  are  to 

Bills  receivable — continued 

indorsed     and     discounted     by 
firm,  670 

on  balance  sheet,  54 

overdue  and  dishonored,  319 

verification  of,  135,  585 
Bills,  validity  of  receipted,  685 
Bonds 

audit  contemplating  issue  of,  698 

average  interest  rate  on,  531 

collateral  trust,  355 

commission  on,  96,  98 

debenture  and  mortgage,  569 

discount  on,  277 

entries  for  sale  of,  2>77 

given  as  security,  412 

income,  355 

mortgage,  355,  569 

of  insurance  companies,  197 

of  other  companies,  320 

of  trust  company,  353 

on  balance  sheet,  28,  54 

periodic  purchase  payments,  531 

redemption  of  in  ten  drawings, 

505 
treatment  in  profit  and  loss  ac- 
count, 505 
value  as  affected  by  interest,  540 
verification  of,  611 
Bonds,  construction 
discount  on,  59 
entry  for  discount  or  premium 

on,  443 
expense  of  sale,  59 
Bonds,  coupon 
audit  of  purchases,  686 
registered  and  unregistered,  686 
verifying  interest  payments,  563 
Bonuses,  as  salary,  2>7 
Book  values  (See  "Values") 
Bookkeeping,  separate  ledger  bal- 
ances, 48 
Brazil,  exchange  accounts  on,  504 


question  numbers) 

Brewery,  inventory  and  sales,  460 
Brick  plant,  liability  for  restora- 
tion of  real  estate,  348 
Brokerage  business,  dividends  on 

inflated  securities,  520 
Brokerage     on     investment     pur- 
chase, 588 
Broker,  merchandise 
audit  of  brokerage  due,  564 
audit   of    shipments    not    made, 
564 
Broker,  monthly  statement  of,  688 
Broker,  stock,  doing  banking  busi- 
ness, 341 
Broker,  stock  exchange 
audit  of  books  of,  245 
balance  sheet  of,  400 
Building  and  loan  association 
audit  of  books  of,  115 
audit  of  mortgages,  318 
auditor's  statement  for,  605 
examination  of  accounts,  331 
Business 
accounts  of  departmental,  2)Z7 
apportionment    of    profits    after 

sale,  494 
audit  for  prospective  purchaser, 

458 
audit  of  books  for  sale  of,  428 
basis  of  sale,  18 

examinations  for  purchaser,  381 
vendor's  statement,  381 


Calico  printing  concern 
inventory  of  copper  rolls,  684 
report    on,    for    bank    commis- 
sioner, 684 
Capital  account 
expenditures  for,  y^ 
items  chargeable  to,  42,  96 
Capital    expenditures    (See    "Ex- 
penditures") 


232 


INDEX 


(References  are  to 

Capital  stock 
balance  sheet  to  effect  sales  of, 

288 
premium  on,  160 
Car  building  company 
inventory    of    cars    under    con- 
struction, 630 
inventory  of  castings,  630 
inventory  of  raw   material,  630 
Car  trust  notes,  in  balance  sheet, 

204 
Cash 
audit    of,    after    close    of   fiscal 

year,  104 
audit  of,  defined,  212 
audit  of  receipts  and  payments, 

200,  314,  594,  703 
audit  of,  when  complete,  277 
audit    of,    when    not    deposited, 

314 
checking  pass  book  and  deposits, 

16 
detection    of   shortage,   55,   221, 

692 
net  investment  certified,  650 
omission  of  entries,  5 
payments,  audit  of,  7,  200 
prevention  of  false  accounts  for, 

511 
shortage  in,  55,  221,  656,  692 
speedy  audit  of,  201 
verification  of,  loi 
Cash  book 
agreement    with    bank    balance, 

656 
and  bank  pass  book,  235 
and  journal,  134 
disbursement  items  in,  656 
erroneous  entries  in,  486 
gross  entries  of  receipts  in,  656 
how  verified,  85 
of  absconding  cashier,  533 


question  numbers) 

partial   and   complete   audit  of, 

514 
problem  of  shortage  in,  656 
reconciled    with    bank    balance, 

692 
three-column  form  of,  486 
verified  without  adding,  695 
Cashier,    irregularities    in    books, 

276 
Certificate,  auditor's 
correct  form  of,  91,  230,  492 
for   building   and    loan    associa- 
tion, 605 
for  company's  prospectus,  493 
for    layman    unacquainted    with 

business,  574 
for  mercantile  agency,  327 
of  balance  sheet  of  grocer,  574 
of  correctness  of  balance  sheet, 

621 
of    net    earnings    for    ten-year 

period,  126 
of  net  earnings  of  manufactur- 
ing company,  610 
qualified  form  of,  179 
qualifications  in,  290 
to  balance  sheet,  290 
valid  form  of,  124,  178 
Certified  public  accountants 
audit  in  interest  of  retired  part- 
ner, 457 
employment  as  auditors,  476 
prepared  balance  sheet  submitted 
for  approval,  623 
Charitable  organization 

collectors'  accounts,  171 
Check  book  for  audit  purposes,  26 
Checking 
five    methods    of    internal    con- 
trol, 644 
for  prevention  and  detection  of 

frauds,  644 
gas  company  accounts,  365 


INDEX 


233 


(References  are  to 

Checking  system 

for  general  journal,  215 

for  purchase  journal,  215 

for  savings  bank,  677 
Checks 

as  vouchers,  60,   141 

listed  on  deposit  tickets,  580 

list  of  returned,  681 

paid,  audit  of,  223 

shortage  in  canceled,  573 

unpaid,  audit  of,  68 
Chemical  manufacturing  company 

audit  of,  410 

patent  rights  of,  410 
Clearing  house 

bank,  361 

stock  exchange,  361 
Club 

accounting  method  as  check  on 
loss  of  goods,  545 

initiation  fees  in  annual  report, 

454 
monthly  audit  of,  535 
monthly  statement  of  treasurer, 

453 
prevention  of  dishonesty  in,  535 
Coal  mining  company 
bond  issue,  367 
books,  audit  of,  420 
profit  and  loss  account,  403 
reserve  fund  for  redemption  of 

bonds,  367 
segregation  of  accounts,  420 
sinking  fund  for  bond  redemp- 
tion, 403 
trial  balance,  420 
valuation  of  leasehold,  498 
valuation  of  plant  as  freehold, 
498 
C.O.D.   business,   accounting   sys- 
tem for,  404 
Collateral,  bank  loan  department, 
396 


question  numbers) 

Collateral  trust  bonds,  in  balance 

sheet,  204 
Collector  of   taxes,   audit  of  ac- 
counts of,  671,  673 
Commission  house,  audit  of,  344 
Commission  on  economy  and  effi- 
ciency, 542 
Commissions,     paid     for     selling 

stock,  588 
Complete     audit      (See     "Audit, 

Complete") 
Comptroller  of  currency,  bank  re- 
port to,  354 
Consignments,  596 
Consolidation   (See  "Merger") 
Construction  accounts 

items  chargeable  to,  21 
Construction  bonds  (See  "Bonds, 

Construction") 
Construction  companies 
profits   on   unfinished  contracts 

as  revenue,  159 
unfinished  contracts  in  balance 
sheet,  448 
Contingent  claim,  effect  on  audit, 

496 
Contingent    liability     (See    "Lia- 
bility, Contingent") 
Continuous  audit 
advantages  and  dangers,  483 
distinguished     from     complete, 
513,  594 
Contracts 
adjustment  of  unfinished,  405 
profits  on,  in  revenue  account, 
159 
Contractors 
losses  in  cost  ledger,  302 
closing  books  of,  383 
profit  of,  190 
Controlling  accounts 
checking  ledger  postings,  697 
use  to  auditors,  105 


534 


INDEX 


(References  are  to 

Copartnership 

capital  unpaid,  299 

interest  credits,  299 
Corporation 

audit  of,  for  bond  sale,  456 

audit  when  business  is  large,  29 

balance  due  president  in  balance 
sheet,  456 

books,  audit  of,   191 

books,  initial  entry,  191 

books  to  be  audited,  61 

branches,  audit  of,  260 

constructing    plant    from    pro- 
ceeds of  stock  sales,  429 

expenditures  of,  96,  144 

first  audit,  9,  62,  572 

general  audit  of,  679 

merger  of,  267,  294,  307 

officer   interested   in   purchases, 
218 

officials,  salaries  of,  57 

preliminary  expenses  of,'6i3 

proceeds  of  sale  of  assets,  dis- 
tribution of,  433 

profits  from  absorbed  company, 

485 

purchasing  own  stock,  690 

stock  ledger  of,  82 

"sundry  accounts"  entry,  678 

transfer   book,    examination    of, 
166 
Corporation    accounts,    shares    at 
discount,  45 

corporations  controlled  by  hold- 
ing company,  330 
Corporations,  financial 

methods    of    valuing   securities, 

445 

Cost  accounting  of  manufactur- 
ing association,  345 

Country  store,  trading  orders  for 
merchandise,  467 


question  numbers) 

Coupon  bonds  (See  "Bonds,  Cou- 
pon") 
Credit 
application  for  bank,  386 
application     of     manufacturing 

company,  628 
application  of  trading  concern, 
440 
Cumulative    dividends,   unpaid   in 

balance  sheet,  120 
Currency,    accounts    for    fluctua- 
tion of,  296 
Customers'  accounts,  607 


Debts 
doubtful,  40 
writing  off  bad,  549 

Decedent's  estate   (See  "Estate") 

Defalcations    (See  also  "Fraud") 
by  absconding  cashier,  533 
by  bookkeeper,  268 
by  cashier,  268,  2y6 
by  manipulating  books,  308 
detection  of,  51 
of  grocery  house  cashier,  626 
of  trading  house  manager,  362 
through  cash  book  balances,  533 
through  false  entry  to  profit  and 
loss,  573 

Deficiency,    created    by    deprecia- 
tion, 206 

Department  store 
accounting  system  for,  404 
sales  checks,  audit  of,  316 

Depositors  ledger,  222 

Deposit  slips,  use  of  in  audit,  580 

Depreciation 
and  cost  values,  157 
as  cost  element,  425,  655 
book  entries  for,  425 
charged  to  reserve  funds,  434 
deduction  for,  27 


INDEX 


235 


(References  are  to 

Depreciation — continued 
diminished  reserve  for,  503 
furniture  and  fixtures,  iii,  145 
in    an    electric    lamp    company, 

293 
in  balance  sheet,  90,  425 
in  railroad  accounts,  407 
methods  of  allowance  for,  636 
of  assets,  27,  iii 
on    absorbed    company's    plant, 

325 

on  buildings,  127 

on  efficient  premises  and  plant, 
442 

on  machine  shop,  128 

on  manufacturing  supplies,  338 

on  plant  and  machinery,  65,  66, 
III,  127,  145,  575,  600 

relation  to  bonus  stock,  165 

reserve  for,  242,  489 

reserves    for   in   balance    sheet, 
654 
Deterioration      (See      "Deprecia- 
tion") 
Disbursements 

audit  of,  180,  313 

from  cash  receipts,  603 

in      governmental      accounting, 
694 

of  manufacturing  company,  313 

vouchers  for,  691 
Discounts 

as  affecting  inventory,  375 

book  entry  for,  443 

cash,  on  purchases,  465 

check  on,  100 

entries  for,  631 

how  verified,   106 

on  mortgage  bonds,  107 

on  outstanding  accounts,  189 

on  sales  of  stock  and  bonds,  470 

on  securities,  139 


question  numbers) 

reserve  for,  510 
trade  and  cash,  639 
Dishonesty     (See    also    "Fraud," 
"Theft,"   "Defalcation") 
of  cashier,  193 
Dividends 
accrued,  book  entry  for,  588 
and  depreciation  reserve,  434 
at  expense  of  depreciation  re- 
serve, 509 
cumulative,  120 
from  general  surplus,  220 
from  stock  premiums,  217,  266 
in  excess  of  profits,  338 
method  of  checking  when  paid, 

216 
on  common  and  preferred  stock, 

471 
on  profits   from  rising  market, 

499 

on  sole  basis  of  receipt  and  dis- 
bursement statement,  156 

paid  from  surplus,  338 

without  formal  declaration,  ZZZ 
Drafts,  payment  by,  226 
Dry-goods  concern 

audit  of,  181 

commissions  of  salesmen,  521 

expenses  of  salesmen,  521 

ledger  balances,  48 


Earnings 

of  electric  lighting  companies, 
321 

of  gas  companies,  321 

of  railroads,  321 

omitted  from  profit  and  loss,  146 
Earnings,  net 

correct  statement  of  railroad, 
20 

how  determined,  112 

of  past  periods,  126 


236 


INDEX 


(References  are  to 

Electric  lighting  plant 
accounts  and  records  of,  378 
classification  of  accounts,  527 
depreciation  of,  293 
earnings  of,  321 
examination    of    accounts,    328, 
378 

Embezzlement 
audit  in  case  of,  80 
by  bookkeeper,  308 
by  bookkeeping  cashier,  435 
by    cashier    having    access    to 

books,  491 
detection  in  bank,  326 
in  jobbing  house,  435 
methods  of  detection,  491 

Equipment,     book     entries     when 
destroyed,  22 

Errors   in   merchandise   returned, 

233 
Estate  of  decedent 
assets,  audit  of,  431 
audit  of  principal  and  income, 

343 

distribution  of,  343,  373 

funds  with  trust  company,  322 

mortgage  holdings,  373 

sale  of  rights  or  warrants,  Z73 

stock  and  dividends  as  part  of, 
393 
Ethics,  accountancy,  270 
Examination 

distinguished    from    audit,    335, 
346 
Exchange 

effect  of  variation,  484 

on  China,  484 
Executors 

audit  of  books  of,  447 

final  accounting  of,  392 

statement  for  probate  court,  392 
Executor's  accounts 

audit  of,  130,  187 


question  numbers) 

documents  for  audit  of,  147 
Expenditures 

capital  and  revenue,  Jz,  96,  121 

taken  from  profits,  493 

treatment  of  corporation,  96 
Expenditures,  capital,  693 

for  charitable  institution,  102 

for  gas  company,  102 

for     manufacturing     company, 
102 

when  closed  to  profit  and  loss, 
30 
Expense 

charged  to   "improvements,"  30 

charged    to    manufacturing    ac- 
count, 148 

classification  of,  696 

omitted    from   profit    and    loss, 
146 
Export  trade 

investigation  of  fraud  in,  413 


Factor's  accounts,  interest  on,  303 
Fiduciary  accounts,  audit  of,  198 
Finished  goods,  inventory  of,  676, 

680 
Fluctuation 
of  currency,  296 
of  prices  of  materials,  556 
of  real  estate  values,  556 
of  stock  and  bond  values,  556 
Footings  and  postings 
of  controlling  accounts,  697 
prevention  of  fraud  in,  579 
Fraud 

failing  to  record  sales,  236 
in  bills  receivable  account,  275 
in  books  of  water  registrar,  664 
in  cash  accounts,  511,  577,  642 
in  factory  pay-rolls,  234 
in  merchandise  accounts,  642 
in  payment  of  wages,  17 


INDEX 


^n 


(References  are  to 

Fraud — continued 
in  pay-rolls,  176 
in  purchase  invoices,  501,  577 
of    grocery    house    bookkeeper, 

557 
organization  favoring,  268 
prevention  of  in  bank,  379 
prevention  of  in  pay-rolls,  577 
prevention  of  through  checking, 

644 

through  cash  book,  308 

through  time  sales,  315 
Freehold  of  coal  company,  529 
Freight 

entries  for,  631 

entry  in  profit  and  loss,  600 
Furniture  of  partnership,  658 


Gas  companies 
audit  of  amounts  due  from  cus- 
tomers, 94 
betterments    and   operating   ex- 
penses of,  324 
capital  expenditures  of,  102 
classification  of  accounts,  527 
depreciation  charges,  206 
earnings  of,  206,  321 
examination  of  accounts,  328 
writing  assets  up  or  down,  207 

Going  concern,  good-will  of,  195 

Goods  on  approval,  treatment  in 
statements,  154 

Goods  on  consignment 
audit  of,  79 
book  entries,  31 

Goods   unsold,  audit  of,   79 

Good-will 
account  with,  92 
definition  of,  524 
effect  of  writing  off,  202 
in  annual  statement,  92 
in  taxation  statement,  155 


question  numbers) 

of  acquired  company,  274 

of  corporations,  524 

of  going  concern,  195 

of  subsidiaries,  203 

value  of,  153 

when  profits  are  good,  274 
Grocery  house  (wholesale) 

audit  of  accounts  after  a  fire, 
438 

audit  of  falsified  books,  557 

audit  of  profit  and  loss  account, 
570 

cashier's  defalcation  in,  626 
Guarantors,  payments  by,  209 

H 

Hardware  manufacturing  concern, 

audit  of,  376 
Haulage,  entries  for,  631 
Holding  company 
accounts  of  subsidiaries,  446 
accounts    receivable   of   merged 

companies,  208 
audit  of  books  of,  446 
certified  balance  sheet  for,  446 
statement  of  condition,  634 
Hosiery  company,  audit  of,  397 
Hotel,     monthly     statement     for 
dining  and  wine  room  opera- 
tions, 560 


Ice  company 

accounts  requisite  for  audit  of 
earnings,  541 

advanced  sales  of  coupons,  541 
Importing  and  trading  company 

accounts  with  foreign  custom- 
ers, 537 

certificate  of  correctness  of 
books,  297 

fall  in  exchange  values,  504 

statement  of  affairs,  363 


238 


INDEX 


(References  are  to 

Income 
added  to  profits,  493 
as  offset  to  paper  losses,  490 
auditor's    report   on,    for   bank, 

627 
directors'   report  on,    for  bank, 

627 
from  invested  reserves,  502 
percentage  statement,  265 

Income   bonds,   in   balance   sheet, 
204 

Incorporation,      preliminary      ex- 
penses of,  588 

Indorser,  liability  of,  86 

Industrial    corporation,    examina- 
tion of  accounts,  329 

Inflation  of  profits,  301 

Injuries,  personal 
claims  for,  586 

Instalment  sales 
audit  of  uncompleted  sales,  552 
of  real  estate  company,  552 
of     sewing    machine    agencies, 
552 

Insurance 
adjustment  for  unexpired,  602 
audit  of,  289 

entry   in   profit   and   loss   state- 
ment, 600 
in  balance  sheet,  90 
on  merchandise,  271 
policies,  audit  of,  238 
premiums  paid  in  advance,  588 
unexpired,  after  fire  loss,  481 
unexpired,  in  balance  sheet,  459 

Insurance  companies 
audit  of,  25 
bonds  and  premium  values  for 

balance  sheet  purposes,  28 
mutual  and  stock  forms  of,  358 
securities  account  of,  172 
stock  and  bond  transactions,  197 
valuation  of  risks,  382 


question  numbers) 

Interest 

accrued  as  part  cost  of  invest- 
ment, 588 

accrued,  audit  of,  248 

advanced  on   discounted  notes, 
459 

as  affecting  bond  values,  540 

as  affecting  earnings,  18 

as  part  of  cost,  543 

average    rate   on    stock   invest- 
ment, 536 

in  balance  sheet,  90 

on    advances    by    stockholders, 
495 

on  bonds  bought  at  premium,  14 

on  undrawn  credit  balance,  333 
Interstate  Commerce  Commission 

rules  as  to  depreciation,  394,  407 

rules  as  to  replacement  and 
equipment,  240 
Inventor's  royalties,  audit  of,  292 
Inventory 

agreement    with    cost    records, 
287 

approximate,  after  fire,  438 

auditor's  view  of,  566 

correctness  of,  423 

cost  or  market  price  in,  188,  590 

effect   on,    of   later   collections, 
508 

of  corporation  assets,  433 

of  finished  goods,  676,  680 

of  grain  company,  635 

of  manufacturer's  stock,  512 

of  paper  company,  625 

of  orange  grove,  566 

of  real  estate  company,  566 

of  steamboat  company,  566 

of  stock  in  process,  662 

of  stocks,  24 

of  wholesale  grocer,  566 

real  estate  in,  219 

validity  of  prices,  432 


INDEX 


239 


(References  arc  to 

Inventory — continued 
verification  of,  151 
Inventory,  perpetual 
acceptance    for    balance    sheet, 

387 
advantages    and    disadvantages, 

567 
definition  of,  387 
how  kept  and  verified,  387 
Investments    in   qualified   balance 

sheet,  290 
Invoices 
checking  of,  117 
not  inventoried,  nor  on  books, 
615 
Iron    manufacturing    plant,    audit 
of  books,  185 


Jobbing  accounts,   single-entry 

system,  295 
Jobbing  business 

auditor's   report  on  embezzling 

bookkeeper,  435 
discount  account  of,  465 
organization  of,  295 
Job  orders,  427 
Journal 
checking  system  for,  215 
detecting  false  accounts,  use  in, 

229 
functions  of,  134 


K 


Kiting,  239 


Labor  as  profit  and  loss  item,  600 

Lead  company,  certificates  of  sale 
in  balance  sheet,  285 

Leased  property,  entries  for  ex- 
penditures on,  205 

Leasehold  of  coal  company,  529 


question  numbers) 

Leases 

as  assets,  305 

asset  value  of,  430 

audit  of  unexpired,  389 

in  balance  sheet,  41 

in  profit  and  loss,  41 

methods  of  writing  oflF,  389 

of  railroads,  205 

premium  for,  588 

rent  of  prepaid,  390 
Ledger  accounts 

audit  of,  666 

balance  sheet  audit  of,  597 

verification  of,  598 
Ledger,  cost 

concealed  losses  in,  302 

of  manufacturing  concern,  300 
Ledger,  depositors 

loose-leaf  form,  22.'2 
Ledger,  forms  of,  550 
Ledger,  general 

controlling  accounts  in,  665 

departmental  accounts  in,  2>Z7 
Ledger,  loose-leaf 

for  depositors,  222 

objection  to,  222 
Ledger,  stock 

verification  of,  82,  255 
Ledgers,  subsidiary 

postings,  224 
Letter  of  firm  to  auditor,  487 
Liabilities 

correctness  of,  13 

in  balance  sheet,  204 
Liability,  contingent 

definition  of,  649 

examples  of,  649 

in  balance  sheet,  649 
Life  insurance 

of  company's  manager,  518 

premiums  charged  to  disburse- 
ments account,  518 


240 


INDEX 


(References  are  to 

Life  insurance  agent  (See 

"Agent") 
Life  insurance  company 
apportionment  of  premiums, 

539 
assets  and  liabilities  of,  380 
premium  accounts,  539 
purchase  of  agent's  interest,  284 
revenue  and  expense  accounts, 
380 
Loans 
security  for,  173 

shares    and   bonds    as    security 
for,  412 
Locomotive  plant,  351 
Loss  and  gain  account,  reflecting 

fluctuating  values,  95 
Losses 
fire,  adjustment  of,  289,  641 
obscured  by  dividend  payments, 

509 
on  collections,  262 
Lumber  company 
book  value  of  stumpage,  521 
depreciation  accounts  of,  418 
renewals  and  betterments  of, 

418 
report  on  operations  and  inven- 
tories, 657 
statement  to  stockholders,  657 

M 
Machinery  and  tools 
audit  of,  53,  449 
cost  entries  for,  682 
depreciation  of,  682 
in  locomotive  plant,  351 
sales  of,   credited  to  merchan- 
dise, 503 
Machine  shop,  depreciation  of 

plant,  128 
Maintenance  and  repairs 
charged  against  revenue,  575 


question  numbers) 

dividends  and,  182 

how  charged,  163 

in  balance  sheet,  i 

in  profit  and  loss  account,  i 

reserve  for,  242 
Manufacturing  accounts 

balance  of,  44 

expense  chargeable  to,  148 
Manufacturing  concerns 

accounting  system  of,  368 

accounts  for  expenses,  369 

appraisal  of  real  estate  of,  370 

audit  of,  25,  357,  368,  672 

audit  of  hardware,  376 

audit  of  hosiery  company,  397 

average  profits  of,  35 

balance    of    cash    discount    ac- 
count in,  465 

balance  sheet  of,  359 

bond  sales  at  discount,  470 

certificate  for  annual  report, 
395 

certificate  of  profits,  370 

classification  of  accounts,  527 

cost  accounts  of,  345 

cost  ledger  of,  300 

depreciation  of  plant,  65,  66,  370 

examination  of  accounts,  329, 
370 

expense  distribution  in,  369 

general  audit  of,  414 

inventories,  188 

net  profits  of,  38,  78 

profit    and    loss    statement    of, 
600 

purchase  of  raw  material,  371 

report  of  auditor  on,  359 

sales  of  old  machinery,  43 

stock  sales  at  discount,  470 

trial  balance  of,  414 

voucher  for  wages,  99 
Manufacturing  cost 

salaries  chargeable  to,  56 


INDEX 


241 


(References  are  to 

Manufacturing  cost — continued 
wages  chargeable  to,  56 

Mercantile  house 
locating  accounting  errors,  576 
market  value  of  real  estate,  565 
profit  and  loss  account  in,  162 
trading  accounts  in,   162 

Merchandise 
audit  of,  53 
correcting  entries   for  unsold, 

131 
entries   for  consignments  of, 
596 

in  bond  and  warehouse,  298 

test  of  credits  for,  55 

verifying  account  with,  264 
Merger 

good-will  value  in  case  of,  437 

of  coal,  fuel,  and  lumber  con- 
cerns, 420 

of  companies,  267,  294,  307 

report  for  prospective,  247 
Milling  company,  special  features 

in  audit  of,  647 
Mines  and  quarries,  depreciation 

of,  528 
Mining  company,  depreciation  of 

wasting  assets,  415 
Minute  book,  use  to  auditor,  311 
Misappropriation     (See    "Fraud" 

and  "Theft") 
Mortgage  bonds 

discount  on,  107 

in  balance  sheet,  204 

premium  on,  107 
Mortgages 

canceled  or  fictitious,  318 

cost  of  giving,  96,  588 

guard  against  duplicate,  546 

how  verified,  611 

on  Florida  real  estate,  546 
Municipal  corporations 

accounts  of,  distinguished  from 


question  numbers) 

private  accounts,  360 
audit  of  accounts  of,  384 
books,  audit  of,  342 
building  operations  of,  571 
expenditures  of,  109 
payments,  audit  of,  109 
receipts  and  disbursements  of, 

360 

N 
National  bank  (See  "Banks") 
National  Bank  Act,  701 
Net  profits,  determination  of,  46 
Notes 
extended  beyond   datings,   554 
legal  evidence  of  payment,  661 
Notes  receivable   (See  "Bills  Re- 
ceivable") 

O 

Obsolescence 
of  manufacturer's  stock,  512 
of  street  railway  equipment,  472 
Opening  entries,  how  verified,  62 
Operating  expenses,  amounts 

chargeable  to,  324 
Operations 
percentage  statement,  265 
special  accounts,  646 
statement  for,  646 
Organization  expenses   as  assets, 

192 
Outstanding  stock,  accounts,  etc. 
(See     "Stock,"     "Accounts," 
etc.) 
Overdrafts  of  doubtful  value,  174 


Paper  and  pulp  company,  inven- 
tory, 625 
Parent  company 

accounts  with  subsidiaries,  614 

balance  sheet  of,  210 


242 


INDEX 


(References  are  to 

Parent  company — continued 
consolidation  of  accounts  with 
subsidiaries,  6i6 

Partial    payments,    theft   in    con- 
nection with,  462 

Partnerships 
adjustments  on  dissolution,  538 
admitting  new  partner,  409 
debits  and  credits  in,  340 
debits  for  furniture,  658 
dissolution  of,  405 
division  of  profits,  340 
documents  for  audit,  103 
interest  on  capital,  46 
interest  on  capital  advances,  473 
investigation    or    retirement   or 

decease  of  partner,  633 
items  for  audit,  503 
ledger  accounts,  audit  of,  116 
manufacturing  accounts  of,  503 
papers,  use  to  auditor,  312 
partners'  accounts  in  balance 

sheet,  72 
partner's  additional  capital,  50 

Patents 
accounts  with,  385 
as  an  asset,  497 

Payments,  average  date  of,  534 

Pay-rolls 
concealing  fraud,  176 
correctness  of,  691 
debited  to  plant,  231 
fraud  in,  234 
of  textile  mill,  372 
verification  of,  151,  402 

Percentage,  use  of  in  presenting 
reports,  265 

Perpetual  inventory  (See  "Inven- 
tory, Perpetual") 

Piece  rate,  in  textile  mill,  372 

Plant 
account  with  in  absence  of  de- 
preciation reserve,  659 


question  numbers) 

additions  to,  421,  424 

enhanced    values,    book   entries 
for,  34 

enhanced  values,  treatment  of, 
282 

entries  for  cost  of,  429 

maintenance  and  repair  charges, 
587 

outlays    for,    163 

pay-roll  charges  to,  231 

repairs  charged  to,  182 
Postings    (See  'Footings,"  etc.) 
Preferred  stock  (See  "Stock") 
Premiums 

accounting  entries  for,  547 

bond,  107,  443 

bond,  entry  for,  443 

life  insurance,  284 

on    company    stock,    used    for 
dividends,  160,  217,  266 

on  proprietary  article,  119 

on  securities,  139 
Price,  selling 

contingent  on  market  price,  285 
Prior  periods,  as  affecting  audit, 

191 
Profit  and  loss 

arising    from    assets    and    lia- 
bilities, 143 

balance  of,  44 

classifying  items,  251 

enhanced  values  in,  34 

entries  for  real  estate  values,  595 

entry  for  incompleted  work,  482 

example  of  account  for  audit- 
or's revision,  506 

expenditures  debited  to,  47 

fluctuating  assets  in,  253 

from  contingent  claims,  586 

from  depreciation,  586 

from  interest  accrued,  586 

from  stock  and  bond  purchases, 
325 


INDEX 


243 


(References  are  to 

Profit  and  loss — continued 
income  credited  to,  47 
in  mercantile  house,  162 
leases,  how  treated  in,  41 
of  street  railway,  439 
of  trading  company,  440 
on  doubtful  bills  receivable,  586 
on  insurance  premiums  paid, 
586 

Profits 
affected  by  repairs  and  renew- 
als, 36 
annual,  how  found,  146,  650 
at  expense  of  depreciation  re- 
serve, 589 
auditor's  certificate  as  to,  52 
average  annual,  35 
falling  off  of,  211 
for  current  year  from  continu- 
ous accounts,  488 
from  bond  investments,  320 
inflation   of,   provision   against, 

301 
net,  of  manufacturing  corpora- 
tion, 38 

Property,  uninsured,  238 

Public  service  corporation 
depreciation  reserve  of,  232 

Public  utility  corporation 
discounts  and  bad  debts,  444 
revenues  of,  444 

Purchases 
checking  invoices  of,  501 
fictitious,  detection  of,  93 
fraud  in  by  vendor,  632 
not  entered  in  books,  463 
prevention  of  fraud,  501 


Railroad  companies,  steam 
audit  of,  for  limited  period,  225 
audit  of  net  earnings,  20 
construction  account,  21 


question  numbers) 

dividend  cash  deposited,  as  as- 
set, 618 

earnings  of,  321 

equipment  and  liabilities  there- 
for, 407 

equipment  destroyed,  22 

examination  of  accounts,  328 

expense  for  new  stations,  364 

maintenance  of  equipment,  426 

preferred  stock  dividend  as  lia- 
bility, 618 

purchases    of,    not   entered   on 
books,  463 

replacements,  rules  for,  240 
Railroad  companies,  street 

accounts  for  obsolete  material, 
472 

audit  of  earnings,  366 

chart  of  railroad  accounts,  530 

classification   of    accounts,    527, 
530 

collection  of  earnings,  366 

first  annual  audit,  439 

monthly  adjustment  of  revenue, 
466 

profit  and  loss  account  for,  439 

reserve  for  accidents,  461 
Raw  material,   detection  of  theft 

of,  23 
Real  estate   (See  also  "Real  Es- 
tate Business") 

increased    valuation    in    profit 
and  loss  account,  595 

investments   in,  verification  of, 
611 

mortgaged,  in  balance  sheet,  219 

reduced    values    in    profit    and 
loss  account,  595 
Real  estate  business 

accounts,  audit  of,  349 

audit  of,  53,  248 

balance  sheet  of,  349,  568 


244 


INDEX 


(References  are  to 

Real  estate  business — continued 
bond    issue    against    mortgages 

on,  398 
enhanced  values  and  book 

values,  575 
expenses  of,  374 
financial  statement  of,  374 
first  audit  of  development  com- 
pany, 559 
income  account  of,  349 
sale  of  lots  on  contract,  391 
sale  of  mortgage  bonds,  391 
sale  of  plots  and  acreage,  374 
Reconcilement  account  with  bank, 

129,  235 
Reconciliation  of  cash,  254 
Registrar  of  corporation 
audit  when  absent,  336 
audit  when  present,  336 
Relief  association,  audit  of,  689 
Renewals  (See  "Betterments") 
Rent,  in  profit  and  loss  statement, 

600 
Repairs  (See  "Maintenance") 
Report  of  auditor 
as  affecting  loans,  new  capital, 

or  sales,  242 
as  to  contemplated  merger,  247, 

267 
in  interest  of  purchaser,  532 
on  factory  products,  241 
on  goods  in  inventory,  241 
on  grain  exporting  company, 

532 
on  lumber  company's  statement, 

657 

supporting  schedules  to  accom- 
pany, 582 

when  books  are  improperly  kept, 
332 

when  books  are  properly  kept, 
322 


question  numbers) 

Reports    from   local   accountants, 
261 

Reserve  funds 
abatement  of  cost  credited  to, 

613 
depreciation  chargeable  to,  434 
distinguished  from  reserves,  132 
investment  of,  15 

Reserves 
distinguished   from  reserve 

funds,  132 
for  steamship  company,  75 
for  telegraph  company,  75 
income  on  invested,  502 

Reserves,  secret 
advantage  and  danger  of,  553 
auditor's  duty  toward,  553 
auditor's  view  of,  170 

Restaurant,  fraudulent  conduct  of, 
455 

Revenue  account 
and  expenditures,  y^ 
items  chargeable  to,  42,  96 
uncompleted  contracts  as  items 
of,  159 

Royalty 
audit  of  inventor's  account  with, 

292 
capitalization  of  owned,  279 
dividend  on,  279 
in  annual  statement,  87 
in  profit  and  loss  statement,  600 


Salaries 
bonus  for  extra  services,  Z7 
chargeable  to  extensions  or  im- 
provements, 451 
of  corporate  officers,  57 
overdrawn,  589 
Sales 
accounting  for  proceeds  of, 
without  checking,  590 


INDEX 


245 


(References  are  to 

Sales — continued 

amount  of  net,  199 

audit  of  padded  cash,  455 

by  consignee,  book  entries  for,  31 

cash   verification  of,  106 

increased  at  end  of  period,  503 

omission  in  books,  S 

returned,  check  on,  93 

returned,  in  profit  and  loss 
statement,  600 

time,  fraud  through,  315 
Salesmen,  commissions  of,  600 
Savings  banks 

audit  of,  84,  677,  701 

audit   of,    concurrent   with   ex- 
amination, 675 

verification  of  cash  book,  683 
Secret  reserves  (See  "Reserves") 
Securities 

depreciation  of  as  affecting  re- 
port, 544 

discounts  and  premiums  on,  139 

examination  of,  19 

fluctuating  values  of,  in  audit, 
556 

losses  on  paper  compensated  by 
earnings,  490 

of  insurance  companies,  197 

premium  on  purchase  of,  588 

registration  of,  356 

verification  of,  123,  172,  585,  611 

written-up  values,  520 
Shares  (See  "Stock") 
Shareholders     (See     "Stockhold- 
ers") 
Single-entry  system,  ascertaining 

profits  under,  63 
Sinking  fund 

entries  for,  6z7 

for  retiring  bonds,  637 

how  set  up,  113 

use  of,  113 
Social  club,  verifying  cash  of,  269 


question  numbers) 

Speculation 

broker's    statement   to   specula- 
tor, 688 
Statements 

financial,    for    credit    purposes, 
628 

of  assets  and  liabilities,  669 

of  corporation  treasurer,  687 

profit  and  loss,  errors  in,  562 

profit  and  loss,  for  trading  and 
manufacturing  business,  600 
Steamship  companies 

earnings,  audit  of,  419 

fraud  in  trip  statements,  419 

reserves,  75 
Stock,  capital 

auditor's  appraisement  of,  532 

books  and  records  for,  660 

company's  own,  273 

in  balance  sheet,  54 

issued  at  discount,  45 

of  insurance  companies,  197 

overissue  of,  660 
Stock  certificate  book,  audit  of,  ZZ^ 
Stock  certificates 

registration  of,  356 

transfer  of,  252,  469 
Stock     exchange     broker      (See 

"Broker,  Stock  Exchange") 
Stock    exchange    clearing    house, 

361 
Stockholders 

capital  and  surplus  accruing  for 
minority,  617 

interest  on  advances  by,  495 

preferred  and  common,  452 

safeguarding  interests  of,  452 
Stock  ledger,  82,  255 
Stock  (merchandise) 

correct  inventory  of,  480 

inventory  value  of,  24 
Stock  outstanding 

amount  of,  244 


246 


INDEX 


(References  are  to  question  numbers) 


Stock  outstanding — continued 
proof  of  value,  158 
verification  by  transfer  ledger, 

309 
Stock,  preferred 
dividends  on,  471 
safeguarding  holders  of,  609 
Store,  country 
trading  orders  for  merchandise, 
467 
Stumpage 
book  value  of,  521 
definition  of,  521 
Subsidiary  companies 
accounts  with  parent  company, 

614 
acquirement  of,  652 
assets  on  books  of  controlling 

company,  207 
audit  of,  551 
capital   and   surplus   in  balance 

sheet,  617 
capital  stock  of,  without  market 

value,  214 
central  purchasing  plant,  551 
expenditures  on,  653 
outlays  for,  702 
pay-roll  advances,  551 
profits  of,  209 

relation  to  parent  company,  210 
Subsidiary  ledgers,  224 
Supporting     schedules,     accounts 

covered  by,  263 
Surplus 
accrued  from  royalties,  279 
decreased    by    debit    to    invest- 
ment, 592 
dividends  paid  from,  338 
Suspense  account 
accounts  receivable  in  as  assets, 

281,  474 
entries  in,  125 
good-will  carried  in,  471 


Tael,  discount  on  exchange,  484 
Taxes 

accrued,  in  balance  sheet,  459 

bank  check  as  tax  voucher,  246 

interest  on  overdue,  671 

return  for  corporation,  619 

return  to  commissioner  of,  674 
Textile   mills 

pay-r9lls  of,  2)7^ 

piece-work  basis  in,  372 
Theaters,  audit  of  books  and  ac- 
counts, 648 
Theft 

detection  of,  193 

of  raw  material,  23 

of  stock,  150 

of  tools,  184 

prevention  of,  184 

through   collusion   of   salesmen 
and  cashier,  316 
Time-keeping  system,  408 
Title 

charges  for  transfer,  613 

transfer  of,  613 
Tools  (See  "Machinery") 
Trading  accounts 

balance  of,  44 

in  mercantile  house,  162 
Trading  concerns 

audit  of  apparent  defalcations, 
362 

branch  store  accounts,  z^^j  4^8 

profit  and  loss  account  of,  507 

report  on  for  bank,  440 
Transactions,  miscellaneous 

correctness,  how  certified,  622 
Transfer  book  (ledger)  and  stock 

outstanding,  309 
Transfer  books,  auditor's  view  of, 

166 
Treasurer,  audit  of  receipts,  314 
Treasury  stock,  in  balance  sheet, 


INDEX 


247 


(References  are  to  question  numbers) 


Trial  balance 

compared  with  balance  sheet,  49 

errors,  detection  of,  83,  118 

itemized  for  balance  sheet,  635 

of  grain  company,  635 

of  manufacturing  company,  357 
Trust  company 

as  trustee,  353 

audit  of,  353 

books  and  accounts  of,  399 
Trustee's  accounts,  audit  of,  103 

U 

Unit  of  production,  668 


bank  check,  for  tax  payments, 
246 

cash,   audit  of,  67 

checks  as,  60,  141,  226 

for  disbursements,  581 

for  labor  costs,  74 

legality  of  form,  226 

receipted  bills    for   unreceipted, 
685 

reproduction  and  second  pass- 
ing of,  7 

reproduction,  prevention  of,  122 

unacceptable  in  corporation 
audit,  283 


Values,  increased 

book  entries  of,  34 

on  balance  sheet,  34 
Values,  cost  and  book,  606 
Verification  of 

accounts  payable,  576 

accounts  receivable,  576 

balance  sheet,  459 

bank  loans,  194 

bills  payable,  576 

bills  receivable,  576 

bonds  and  stocks,  227 

building  and  loan  accounts,  115 

cash,  loi,  106,  177,  194 

discounts,  106 

inventories,  151 

journal  entries,  229 

pay-rolls,  151 

returns  and  allowances,  106 

securities,  177,  194,  243 

social  club  cash,  269 

stock  ledger,  255 
Village  accounts,   verification  of, 

140 
Vouchers 

audit  in  absence  of,  422 

audit  of,  3,  313,  422,  581 


W 

Wages 
audit  of  unclaimed,  551 
fraud  in  payment  of,  17 
voucher  for,  99 
Wasting  assets,  depreciation  for, 

529 
Water  supply  company 
auditor's  failure  to  detect  fraud, 

664 
fraud  in  cash  book  of,  664 
registrar  of,  664 
Wine  and  liquor  accounts,  500 
Wool 
consigned  to  dealers,  339 
inventory  of,  339 
purchases  and  sales  of,  339 
received  on  consignment,  339 
Working  orders,  as  proof  of  ex- 
penditures, 427 
Working  papers 

for  semiannual  audit,  705 
preparation,     arrangement    and 
preservation  of,  601 
Work  in  process,  payments  for  in 

balance  sheet,  32 
Work  unfinished,  credited  to  profit 
and  loss,  482 


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